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Increased Uninsured and Slumping Markets Threaten Bed Capacity

Orlando and Tampa Bay area hospitals faced declining revenues and increased uncompensated care last year as a result of a nationwide economic slowdown. But it's the slumping stock market, particularly the bond market, that's hurting hospitals even more this year.

An overall decline in all areas of the economy has increased the ranks of the uninsured – now up to 20 percent in Florida – and the underinsured, which ends up costing hospitals in terms of uncompensated care and bad debt. Together with the stock market and bond market declines and cuts to government programs, hospitals are facing an extra crunch.

In 2007, Florida hospitals on average faced sinking operating margins, based on data from the Florida Health Care Administration. But when considering total margin, which includes investment income, hospitals looked much better. Statewide, profits rose roughly 14 percent.

That may not be the case this year as hospitals face declining investment income. As a result, the Central Florida hospital market could see a slow-down in capital construction projects, further pinching the demand for healthcare in an economy where fewer people have the means to pay for it.

Orlando Health, for instance, faces a net-loss of $3.5 million this year, representing the period between July 2007 and June 2008, said Bob Miles, vice president of financial planning. Over the same period last year, it earned $72 million in net income. One of the main reasons for the change, says Miles, is declining investment income.

Last year Orlando Health earned $32 million off investments, while this year it earned just $5.8 million as of June 30, Miles said. The hospital system traditionally uses that investment revenue to pad losses in other areas such as rising amounts of uncompensated care, Miles said. In order to adjust, they may have to slow down on future construction when demand dictates they expand.

"That's really the unwritten story," Miles said. "That investment income tended to help support capital expansions."

Miles pointed to the unfavorable trading of variable interest bonds, which hospitals largely use to borrow money for construction projects, for another factor that both dampens their overall economic outlook and discourages new construction. Orlando Health, meanwhile, is building a 150-bed expansion to Dr. P Phillips Hospital to open in the Fall of next year.

"Those bonds traded favorably in the market with low interest rates," Miles said. "The whole market got skittish. It was never a problem with the credit of hospitals; it was just the skittish marketplace that didn't want to make any investments in bonds. I've had meetings with CFOs around the country and everyone's had to restructure their debt."

Florida Hospital, meanwhile, recorded extremely healthy returns in 2007 unlike most of its counterparts. The 3,000-bed hospital system earned $137 million in 2007 representing a 9 percent total margin. Rich Morrison, regional vice president, said maintaining robust profits are important for earning strong bond ratings in order to finance construction projects.

"You've got to have certain financial diligence to meet those expectations," Morrison said.

Even though it leads Orlando hospitals in income, Florida Hospital is gearing up to strengthen its relations with area clinics as a way to decrease visits to the emergency room, typically the most expensive place to receive care.

"We're actively looking at those things we can do in cooperation with the community that creates better access for the uninsured," Morrison said.

Florida Hospital also is looking for administrative efficiencies – reducing administrative staff mostly through attrition – before it considers changes to patient care or drastic rate increases, said Morrison.

Over at Tampa General Hospital, Steve Short, its chief financial officer, said the hospital is trying to reduce patients' length of stay as a way to save costs. Tampa General reported a $17 million operating deficit in 2007, but a total income of more than $44 million.

"We're trying to shorten length of stay that patients are in the hospital by more aggressive case management that makes sure the consultations get done," Short said. "A lot of times the patient is ready to go but they don't get discharged."

Larger hospitals certainly have an advantage, Short said, because of increased volume and high-end care.

"It's definitely a much more difficult, competitive environment," Short said. "Expenses are growing faster than revenues. Malpractice and property insurance have escalated. And on the revenue side we're just not getting any increases from Medicare and Medicaid."

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