In previous OSF HealthCare columns, we’ve focused on the projected future demand for health care services, whether it be driven by aging baby boomers, enhanced technology and drugs, or the general expectations of many Americans to prolong death as long as possible. As a result of this projected demand, hospitals and health systems are facing significant investments in facilities and technology.
To illustrate the extensiveness of this challenge, I’d like to review the first six observations of the September 2003 report, "Financing the Future," just released by the Advisory Board. The Advisory Board is a membership of 2,100 of the country’s largest and most progressive health systems and medical centers (OSF Healthcare System has been a member for many years). The Advisory Board provides best practices research and analysis to the health care industry, focusing on business strategy, operations, and general management issues.
The first observation highlights that there’s growing sentiment among hospital and health system CEOs that the largest issue facing our industry across the next five years is financing future growth, with the crux of concern being availability of sufficient cash to invest in sustaining and growing the enterprise. Supporting this finding are the facts that U.S. hospital capital activities for bond issuance and bank loans have increased substantially from 2000 to 2001, going from $9.9 billion to $15.6 billion and from $3.8 billion to $10.5 billion, respectively.
The second observation notes leverage already is increasing for most hospitals, and ratings agencies are increasingly worried the industry can’t generate the cash flow necessary to maintain a stable balance sheet. In a September 2002 corporate ratings report on the U.S. health care sector, Standard and Poors stated: "Many systems have come back to the financial markets to issue debt for new projects and refundings of existing debt after a hiatus of several years…The ability of each hospital and health system to perform at the level required to generate cash flow and debt capacity needed to maintain an organization’s future remains as vital, and as challenging, as ever."
According to the third observation, the ratings agencies’ anxiety isn’t without merit; despite best efforts at more aggressive revenue cycle management, many hospitals find their balance sheets increasingly weakened by greater financial leverage. For example, in 1997, the median day’s cash on hand was 166 and has steadily decreased each year, with the median in 2001 being reported at 139. During that same timeframe, the median cash-to-debt ratio decreased from 102.6 percent to 91.4 percent.
At the heart of the matter is the prospect of steadily rising patient volumes for the foreseeable future; inpatient and outpatient volumes are expected to grow for years to come. This fourth observation is based upon total hospital inpatient days "bottoming out" in 2000 at 140 million, down from a high of 275 million in 1980 and expected to increase to 159 million in 2010, to 186 million by 2020, and to 225 million by 2030.
Closely related is the fifth observation-contending with rising patient volumes is largely a matter of reversing past facilities decisions such as "re-building" beds taken off-line in the past decade. In the mid-1990s there was an 8.1 percent decrease in beds, and between 1994 and 2000, the number of hospital beds dropped from 1,128,000 to 984,000. The report’s sixth observation summarizes the pending financial crisis we’re facing in health care: At the current course and speed, the pace of today’s borrowing by hospitals simply isn’t sustainable. Their growing debt service burden has the potential to quickly impact margins negatively. The Advisory Board estimates the average hospital’s debt was $89.5 million in 2001 and has been increasing the past few years at an annual rate in excess of 10 percent. Further, they estimate that if hospitals average only a 5 percent increase in long-term debt during the next five years, their average margins will dip from 3 percent to 1.9 percent. But if their debt increases an average of 10 percent during that five years, maintaining the trend of the past few years, their margins will dip further to 0.6 percent.
As with all national reports that present averages, the actual numbers for any one hospital or group of hospitals, like the four in our tri-county area, may be close to those noted here or not. What’s important to note, though, is this need for additional capital investment by health care providers and the resulting increase in debt loads will lead to further deterioration of health care provider financial stability and eventually will put more pressure on the cost of health care to the ultimate payer. IBI