Economics of a Not-for-Profit Hospital 

Tough economic times call for unwavering fiscal management – the kind that will sustain an organization for the future.  For Florida Hospital Waterman, which provides over $182 million of healthcare per year, safeguarding the future is critical to our patients’ care.  Like many other enterprises, faith-based community hospitals like Florida Hospital Waterman operate on limited margins, juggling multiple extraneous factors that impact their bottom lines.  And while Florida Hospital Waterman is a not-for-profit organization, it must make a profit in order to survive.  Why?  This Health Issues Brief answers a number of frequently asked questions about the economics of not-for-profit hospitals. 

If Florida Hospital Waterman is a not-for-profit hospital, why are we even talking about profits?

Not-for-profit hospitals don’t generate profits for stakeholders, but must make money in order to:

§  Purchase new technologies

§  Update or replace existing buildings and equipment

§  Bring new medical services to the community

§  Meet the community’s growth demands

What kind of profits are you talking about?

On average, Florida Hospital Waterman generates an operating margin between 5-6%  – money that is reinvested in patient services.  Over the past seven years, Florida Hospital Waterman has spent $151 million for new buildings, beds and equipment – just to keep up with the demand created by our growing community.

As the 4^th largest private employer in Lake County, with over 1,500 employees, 39%  of Florida Hospital Waterman’s revenue goes to salaries, wages and benefits.  Another 19% goes for supplies, equipment, general operations, and facility projects.  Florida Hospital Waterman’s operating income – money to reinvest in patient services – is just 5-6% of total revenues. 

How are hospital rates set?

Most hospital reimbursement rates are set by the government or insurers. And unlike other large service industries such as airlines, there are no government bailouts or subsidies when the external economics crumble.  Medicare pays for patients 65 and older.  It reimburses hospitals through DRGs (diagnosis related groups) using fixed reimbursements for 383 inpatient hospital categories.  Depending on the complexity of a case, hospitals can make money or lose money on a DRG.  This is because very sick patients consume far more resources but are reimbursed at the same rate as patients with few complications.

Over 44 million elderly and disabled Americans receive health care through Medicare.  Providers face Medicare reductions of $155 billion over the next 10 years. Fifty-six percent of Florida Hospital Waterman’s current admissions are Medicare patients.

Medicaid pays for healthcare for the poor.  Florida’s Medicaid program pays hospitals just 74% of the cost of caring for its patients; the national average is 88% of costs. In 2007-2008, Medicaid enrollment increased 9.5%, and forecasters predict another 130,000 enrollees in the next year[1]. As state revenues continue to decline hospitals will continue to see cuts in Medicaid rates.

Additionally, hospitals offer discounts to HMOs and other insurance plans based on expected patient volumes, or to keep the business they have, in the hope of managing costs.

What other forces impact hospital bottom lines?

As North Lake County’s uninsured population grew to 44,466 in 2008, the costs associated with providing health care to this population also grew.  In total, the cost in excess of payments for care provided by Florida Hospital Waterman to the underprivileged was $16.1 million in 2008. 

Florida Hospital Waterman’s rate increases to insurance companies averaged just 5% over the last five years, while pharmaceutical costs increased by 38% between 2000 and 2007.  These cost increases are compounded by an increase in drug utilization.  New products are coming to market faster than ever, and there are greater numbers of unique new drugs, drugs with significant clinical advantages, and new uses for older drugs.

Supply costs are also on the rise.  This year supply costs rose 3.4%, and equipment like PET scanners cost in the millions of dollars.  While Florida Hospital Waterman does negotiate with its suppliers, the limited number of medical suppliers puts hospitals in a weak bargaining position.

External workforce shortages also drive up costs.  Although full-time nurses’ salaries have risen by 10% since the latter half of 2007, Florida has a 7.9% vacancy rate.  Central Florida looks worse with a 10.8% vacancy rate.  So far, hospitals have managed to keep beds staffed, but at greater expense.  In 2008, Florida Hospital Waterman spent $133,310 to provide educational opportunities for nursing students in our community. 

Growing shortages in other allied health professions like imaging technicians and respiratory therapists mean that other salaries will also be subject to increases above the general rate of inflation.

What kind of margin is needed for a hospital to sustain itself in a growing market?

Hospitals can generate income in two ways: increased revenues and decreased expenses. For-profit hospitals generate profits that return dividends to shareholders. Not-for-profits like Florida Hospital Waterman generate margins that are reinvested into new technologies, services, equipment, and physical facilities for the communities they serve.

Not-for profit hospitals need the ability to borrow for things like capital projects. Bond Ratings are given to institutions to indicate their credit quality. The major indicator for a strong bond rating is an institutions operating margin. Due to the weak bond market, even financially stable not-for profit hospitals are unable to borrow and access capital. Not only is there less credit available, but it is more expensive credit. Now more than ever, an organization’s bond rating is an important part of hospital sustainability.

Florida Hospital Waterman will need enough cash to finance the replacement and renovation of existing capital assets, invest in new services and meet the area's projected population growth while maintaining its strong financial rating. Both internal and external market forces make this a continuing challenge.

Providing the highest quality services requires substantial resources. For example, Florida Hospital Waterman’s 64-slice CT scan machine cost $2.1 million, and the Trilogy linear accelerator cost $3.4 million.  This kind of advanced technology is needed for the diagnosis and treatment of multiple diseases.

Preparing for the future
"Our primary mission is clear: to provide quality healthcare to all in our community," says President Ken Mattison.  "We must remain a fiscally viable enterprise to carry out our mission.  Hospitals are unique in that we provide the services, but are not able to negotiate over half of our payments.  Reductions in government payments, rising pharmacy costs, rising numbers of uninsured, and the medical liability crisis all remain challenges.”

“As we look to the future, we know we will continue to be subject to pressures from outside of the hospital.  It is important to work hard today to ensure our tomorrow, and that of our community," Mattison concluded.

Health Issues Brief,  September 2009