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Massachusetts Acute Hospital Financial Performance: Fiscal Year 2009

This report analyzes the financial performance of Massachusetts acute hospitals in fiscal year 2009, including profitability, liquidity, and capital structure ratios. It compares performance trends among different hospital cohorts and provides insights into teaching, community, and disproportionate share hospitals. The report also highlights improvements in overall financial performance and discusses regional variations in margins.

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Massachusetts Acute Hospital Financial Performance: Fiscal Year 2009

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  1. Massachusetts Acute Hospital Financial Performance: Fiscal Year 2009 Division of Health Care Finance and Policy May 2010

  2. About this Report This report is prepared in response to M.G.L. c. 118G, section 6A, which requires the Division of Heath Care Finance and Policy (DHCFP) to assess and report on Massachusetts acute hospital financial performance. It provides a statewide analysis of acute hospital audited financial data over an eight year period (fiscal year 2002 through fiscal year 2009). The report examines hospital profitability, liquidity, and capital structure ratios in order to monitor the financial status of acute hospitals. Presented are industry analyses by quartiles and medians and comparisons of financial performance trends of different hospital cohorts: teaching, community, and disproportionate share hospitals (DSHs). The report is accompanied by individual hospital fact sheets detailing financial trends, which are available on the DHCFP website: www.mass.gov/dhcfp. Summary of Findings for Fiscal Year 2009 • Overall, Massachusetts acute hospital financial performance improved in fiscal year 2009 (FY09) when compared to FY08. • Most hospitals (80%) reported earning a surplus in FY09 compared to 65% in FY08. • Reflecting ongoing uncertainties in the economic climate, one third of hospitals experienced non-operating losses in FY09, about the same is in FY08. Non-operating gains or losses include items which are not related to operations, such as investment earnings. • Liquidity slightly improved reflecting the overall improvement in financial performance. Acute hospitals were able to collect revenue and pay bills in slightly fewer days in FY09 than in FY08. • Hospitals ability to meet debt obligations slightly improved due to increases in total income across the industry in FY09. • Teaching versus Community Hospital Performance • Both teaching and community hospitals reported improved financial performance with increases in median total margins in FY09 compared with FY08. • Disproportionate Share Hospital Performance • Median total profits for all hospitals increased in FY09. However, disproportionate share hospitals’ median total margin is lower than all other hospitals in FY09. Disproportionate share hospitals had a more difficult time meeting current liabilities and took about six days longer to pay their bills than all other hospitals in FY09.

  3. Acute Hospital Total Margin Many hospitals experienced increases in total income. The financially weakest hospitals showed the steepest improvement in FY09 compared with FY08. In 2009, thirteen out of sixty-four hospitals (20%) reported a total loss compared with twenty-three hospitals (35%) during FY08. Benchmark: Northeast US median FY08 = 0.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Total margin is the ratio of total income to total revenue.

  4. Acute Hospital Operating Margin Overall, operating margins have strengthened, with the median operating margin increasing to 1.9% in FY09 from 0.7% in FY08. Fourteen hospitals (22%) reported a loss from operations during FY09. Benchmark: Northeast US median FY08 = 0.9% Benchmark Source: INGENIX Consulting based on the hospital financial database used for the 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Operating margin is the ratio of operating income to total revenue.

  5. Acute Hospital Total and Operating Margins by Geographic Region Hospitals in the Western region of Massachusetts have the lowest total and operating margins in the state. Hospitals in the central and southeast regions of the state have the highest total margins (both at 2.9%) and the southeast region also has the highest operating margin (3.0%). ■ Negative Total Margin ■ Positive Total Margin Note: Regions are categorized using the Department of Public Health’s Emergency Medical Services (EMS) Zones.

  6. Acute Hospital Non-Operating Margin Similar to 2008, many hospitals continued to experience low non-operating margins in 2009. Twenty two hospitals (34%) reported a non-operating loss during FY09. Benchmark: Northeast US median FY08 = 0.07% Benchmark Source: INGENIX Consulting based on the hospital financial database used for the 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Non-operating margin is the ratio of non-operating income to total revenue. Non-operating income includes items not related to operations, such as investment income, charitable contributions, gains (losses) from the sale of assets and other unrelated business activities (such as fundraising expenses, and insurance claim or lawsuit settlements). A parent or foundation that holds assets that the hospital controls may incur a change in beneficial interest in net assets that would be included in the hospital’s non-operating margin.

  7. Acute Hospital Current Ratio A high current ratio indicates the ability to meet current liabilities and a lower probability of financial insolvency. Massachusetts acute hospitals’ short term liquidity slightly improved with a median current ratio of 1.5 in FY09, up from 1.45 in FY08. Benchmark: Northeast US median FY08 = 1.55 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Current ratio is the ratio of current assets to current liabilities.

  8. Acute Hospital Days in Accounts Receivable Days in accounts receivable measures the average number of days that patient receivables are outstanding, or the average collection period. The median number of days taken to collect revenue shortened by two days in FY09 compared with FY08. Benchmark: Northeast US median FY08 = 46.2 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Days in accounts receivable is the ratio of net patient accounts receivable to net patient service revenue/(quarters of data x 91.25).

  9. Acute Hospital Average Payment Period Average payment period measures the time it takes a hospital to pay current liabilities. High values indicate potential liquidity problems. In FY09, the average payment period ranged from a low of 28 days to a high of 142 days, with the median being 57 days. Benchmark: Northeast US median FY08 = 60.3 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Average payment period is the ratio of current liabilities less estimated third-party settlements to total expenses less depreciation and amortization/quarters of data x 91.25.

  10. Acute Hospital Debt Service Coverage Debt service coverage measures the ability to meet principal and interest payments in the coming year. Better coverage, as evidenced by a higher value, results in a better bond rating. This ratio improved in FY09 due to more positive financial performance across the industry. Benchmark: Northeast US median FY08 = 2.7 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Debt service coverage is the ratio of total income plus interest expense plus depreciation and amortization to interest expense plus current portion of long-term debt.

  11. Acute Hospital Cash Flow to Total Debt Cash flow to total debt indicates the potential for future financial problems or insolvency. This ratio improved in FY09 due to improving financial performance across the industry. Benchmark: Northeast US median FY08 = 12.5% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Cash flow to total debt is the ratio of total income plus depreciation and amortization to total current liabilities plus total long-term debt.

  12. Acute Hospital Equity Financing Equity financing measures the proportion of total assets financed with equity. In FY09 acute hospitals’ equity financing declined, reflecting some hospitals’ declining position in net assets. A number of hospitals experienced an actuarial reconciliation of pension related assets and obligations in FY09 which had a negative impact on net assets. Benchmark: Northeast US median FY08 = 47.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Equity financing is the ratio of total net assets to total assets.

  13. Teaching and Community Hospitals • In this analysis, the Division of Health Care Finance and Policy defined teaching hospitals according to the Medicare Payment Advisory Commission’s (MedPAC) definition of a major teaching hospital: at least 25 full time equivalent medical school residents per one hundred inpatient beds. • Based on this definition and using a 2006 base year, the 15 hospitals listed below were assigned to the teaching cohort for all the years of this analysis.

  14. Acute Hospital Median Total MarginTeaching vs. Community Hospitals Both teaching and community hospitals experienced increases in median total margin in FY09 compared with FY08. Teaching hospitals had higher profitability than community hospitals in each of the past eight years. The median total margin was 5.1% for teaching hospitals compared with 1.7% for community hospitals in FY09. Benchmark: Northeast US median FY08 = 0.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Total margin is the ratio of total income to total revenue.

  15. Acute Hospital Total MarginTeaching vs. Community Hospitals, FY09 The overall financial performance of acute hospitals varies widely by teaching status. Three teaching hospitals (20%) reported losses in FY09 compared with five (33%) in FY08. Ten community hospitals (20%) reported losses in FY09 compared with eighteen (36%) in FY08. Benchmark: Northeast US median FY08 = 0.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Teaching HospitalsMedian: 5.1% Community HospitalsMedian: 1.7% 8.4% 7.3% Overall Median 2.2% -6.96% -15.1% Note: Total margin is the ratio of total income to total revenue.

  16. Acute Hospital Median Operating MarginTeaching vs. Community Hospitals The median operating margin improved for community hospitals and teaching hospitals in FY09 compared with FY08. The median operating margin for teaching hospitals was significantly higher in FY09 than it was for community hospitals in FY08 (5% vs. 1.5%). Benchmark: Northeast US median FY08 = 0.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Operating margin is the ratio of operating income to total revenue.

  17. Acute Hospital Operating Margin Teaching vs. Community Hospitals, FY09 Operating margin performance varied widely by teaching status in FY09. Five teaching hospitals (33%) and nine community hospitals (18%) reported operating losses in FY09. Benchmark: Northeast US median FY08 = 0.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Teaching HospitalsMedian: 5.0% Community HospitalsMedian: 1.5% 8.4% 8.4% Overall Median 1.9% -8.1% -18.5% Note: Operating margin is the ratio of operating income to total revenue.

  18. Acute Hospital Median Non-Operating Margin Teaching vs. Community Hospitals Teaching hospitals experienced an improvement in their median non-operating margin in FY09 compared with FY08. Community hospitals’ median non-operating margin, however, continued to decline. The median non-operating margin was slightly higher for teaching hospitals compared with community hospitals in FY09 (1% and 0.2%). Benchmark: Northeast US median FY08 = 0.07% Benchmark Source: INGENIX Consulting based on the hospital financial database used for the 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Non-operating margin is the ratio of non-operating income to total revenue.

  19. Acute Hospital Non-Operating Margin Teaching vs. Community Hospitals, FY09 Four teaching hospitals (27%) and nineteen community hospitals (39%) reported non-operating losses in FY09. Benchmark: Northeast US median FY08 = 0.07% Benchmark Source: INGENIX Consulting based on the hospital financial database used for the 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Teaching HospitalsMedian: 1.0% Community HospitalsMedian: 0.2% 5.4% 3.4% Overall Median 0.2% -1.1% -8.3% Note: Non-operating margin is the ratio of non-operating income to total revenue.

  20. Acute Hospital Median Current Ratio Teaching vs. Community Hospitals Current ratios for teaching and community hospitals have varied over time. However, in FY09 the median current ratio improved among teaching and community hospitals. Benchmark: Northeast US median FY08 = 1.55 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Current ratio is the ratio of current assets to current liabilities.

  21. Acute Hospital Median Days in Accounts Receivable Teaching vs. Community Hospitals In FY09 teaching hospitals took about four days longer than community hospitals to collect revenue. Benchmark: Northeast US median FY08 = 46.2 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Days in accounts receivable is the ratio of net patient accounts receivable to net patient service revenue/(quarters of data x 91.25).

  22. Acute Hospital Median Average Payment PeriodTeaching vs. Community Hospitals In FY09, community hospitals took roughly three days longer than teaching hospitals to pay their bills (58 and 55 days, respectively). Benchmark: Northeast US median FY08 = 60.3 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Average payment period is the ratio of current liabilities less estimated third-party settlements to total expenses less depreciation and amortization/quarters of data x 91.25.

  23. Acute Hospital Median Debt Service Coverage Teaching vs. Community Hospitals Teaching hospitals were better able to meet principal and interest payments than community hospitals in FY09. However, the median debt service coverage ratio improved for both teaching and com-munity hospitals in FY09 compared to FY08. Benchmark: Northeast US median FY08 = 2.7 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Debt service coverage is the ratio of total income plus interest expense plus depreciation and amortization to interest expense plus current portion of long-term debt.

  24. Acute Hospital Median Cash Flow to Total DebtTeaching vs. Community Hospitals Cash flow to total debt ratios show similar trends by teaching status. Both teaching and community hospitals experienced increases in this metric in FY09. The lower this ratio, the more likely a hospital will find it difficult to meet current and long term financing needs. Benchmark: Northeast US median FY08 = 12.5% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Cash flow to total debt is the ratio of total income plus depreciation and amortization to total current liabilities plus total long-term debt.

  25. Acute Hospital Median Equity FinancingTeaching vs. Community Hospitals Teaching hospitals currently have greater equity financing than community hospitals, although the median equity financing ratio declined for both teaching and community hospitals in FY09. A number of hospitals experienced an actuarial reconciliation of pension related assets and obligations in FY09 which had a negative impact on net assets. Benchmark: Northeast US median FY08 = 47.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Equity financing is the ratio of total net assets to total assets.

  26. Disproportionate Share and All Other Hospitals • In this analysis, the Division of Health Care Finance and Policy defines disproportionate share hospitals as those hospitals with a large percentage (63% or more) of patient charges attributed to Medicare, Medicaid, other government payers, and free care. • Based on this definition and using a 2007 base year, the 18 hospitals listed below were assigned to the disproportionate share hospital cohort for all the years of this analysis.

  27. Acute Hospital Median Total MarginDisproportionate Share vs. All Other Hospitals Disproportionate share hospitals generally have lower total profitability than other hospitals. Median total profits for all hospitals increased in FY09. However, disproportionate share hospitals’ median total margin is lower than all other hospitals in FY09 (1.1% and 2.5%). Benchmark: Northeast US median FY08 = 0.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Total margin is the ratio of total income to total revenue.

  28. Acute Hospital Median Operating Margin Disproportionate Share vs. All Other Hospitals Historically, disproportionate share hospitals tend to be less profitable from operations than other hospitals. Median operating margin improved for all hospitals in FY09 compared with FY08, but more sharply for all other hospitals than for disproportionate share hospitals. Benchmark: Northeast US median FY08 = 0.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Operating margin is the ratio of operating income to total revenue.

  29. Acute Hospital Median Non-Operating MarginDisproportionate Share vs. All Other Hospitals Non-operating profits continued to decline for many hospitals in FY09 due in large part to the economic climate. Benchmark: Northeast US median FY08 = 0.07% Benchmark Source: INGENIX Consulting based on the hospital financial database used for the 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Non-operating margin is the ratio of non-operating income to total revenue.

  30. Acute Hospital Median Current RatioDisproportionate Share vs. All Other Hospitals Disproportionate share hospitals’ ability to pay current bills is not as strong as that of other hospitals. Their median current ratio of 1.33 in FY09 was lower than the statewide median of 1.5. Benchmark: Northeast US median FY08 = 1.55 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Current ratio is the ratio of current assets to current liabilities.

  31. Acute Hospital Median Days in Accounts ReceivableDisproportionate Share vs. All Other Hospitals Disproportionate share hospitals took about the same number of days to collect their accounts receivables as all other hospitals in FY09. Benchmark: Northeast US median FY08 = 46.2 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Days in accounts receivable is the ratio of net patient accounts receivable to net patient service revenue/(quarters of data x 91.25).

  32. Acute Hospital Median Average Payment PeriodDisproportionate Share vs. All Other Hospitals Historically, dispropor-tionate share hospitals have taken longer to pay bills than other hospitals. In FY09, dispropor-tionate share hospitals took about six days longer to pay their bills than all other hospitals. Benchmark: Northeast US median FY08 = 60.3 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Average payment period is the ratio of current liabilities less estimated third-party settlements to total expenses less depreciation and amortization/quarters of data x 91.25.

  33. Acute Hospital Median Debt Service CoverageDisproportionate Share vs. All Other Hospitals All hospitals on average show an improvement in meeting current debt obligations in FY09 compared with FY08. However, in general, disproportionate share hospitals have a more difficult time meeting debt obligations than do all other hospitals. Benchmark: Northeast US median FY08 = 2.7 Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Debt service coverage is the ratio of total income plus interest expense plus depreciation and amortization to interest expense plus current portion of long-term debt.

  34. Acute Hospital Median Cash Flow to Total DebtDisproportionate Share vs. All Other Hospitals All hospitals’ cash flow to total debt ratio improved in FY09 from FY08, signaling less difficulty meeting debt obligations. Benchmark: Northeast US median FY08 = 12.5% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Cash flow to total debt is the ratio of total income plus depreciation and amortization to total current liabilities plus total long-term debt.

  35. Acute Hospital Median Equity FinancingDisproportionate Share vs. All Other Hospitals The median equity financing ratio decreased for all hospitals in FY09 compared with FY08. A number of hospitals experienced an actuarial reconciliation of pension related assets and obligations in FY09 which had a negative impact on net assets. Benchmark: Northeast US median FY08 = 47.9% Benchmark Source: 2010 Almanac of Hospital Financial and Operating Indicators, INGENIX Note: Equity financing is the ratio of total net assets to total assets.

  36. Acute Hospital Financial PerformanceFY09 *Denotes Disproportionate Share Hospital. Notes: Mercy Hospital has a 12/31 year end and data for Mercy were not yet available at the time this analysis was completed.

  37. Acute Hospital Financial PerformanceFY08 *Denotes Disproportionate Share Hospital. Notes: Recently, government employers, including Cambridge Health Alliance, were required to implement a new government accounting rule (GASB 45) that required them to record in their financial statements the present value of future retiree health benefit costs. In complying with this new rule, Cambridge Health Alliance’s balance sheet reflects a $221.9M liability and associated operating expense of $12.7M for its 2008 fiscal year. Mercy Hospital has a 12/31 year end and data for Mercy were not yet available at the time this analysis was completed.

  38. Report Notes • The findings in this report are based on the filings of 64 of 65 acute hospitals in 2009; sixty hospitals have fiscal year ends October 1 through September 30. Five hospitals have different year ends: Cambridge Health Alliance, MetroWest Medical Center, and Saint Vincent Hospital have June 30 year ends, and Martha’s Vineyard Hospital has a March 31 year end. Mercy Medical Center has a December 31 year end. Mercy Medical Center’s data were not yet available at the time this analysis was completed. • Annual financial data are reviewed by the Division of Health Care Finance and Policy and verified against either audited financial statements or hospital’s supporting documentation. All submitted hospitals’ data reviews were complete at the time of this analysis except for North Adams Hospital for which as filed data has been used. • Depending on the organization of each hospital, data may exclude other aspects of some hospitals’ financial health, such as financial performance of endowments or the financial health of parent companies or other affiliated organizations. • Quartile values can shed light on information about the distribution of financial ratio values across hospitals. Often, averages can be materially affected by outlier/extreme values at the low and high ends of a distribution. Examining quartiles, therefore, is a preferred means of assessing the overall distribution of values across hospitals. For instance, the ratio values of one-quarter of the hospitals at the lower end of the distribution will fall at or below the 25th quartile value. Similarly, the ratio values of one-quarter of the hospitals at the upper end of the distribution will fall at or above the 75th quartile value. The 50th percentile is the median of the distribution of values. Half of the hospitals’ financial ratio values will fall below the median, and half will fall above the median. These quartile measures are particularly useful when a distribution is markedly skewed, or where it is generally symmetrical but includes a few outliers. • This report uses benchmarks from data available in the 2010 Almanac of Hospital Financial and Operating Indicators published by Ingenix. There is a two-year lag from the publication data, therefore the most current benchmark data for this report are 2008 data.

  39. Division of Health Care Finance and Policy Two Boylston Street Boston, Massachusetts 02116 Phone: (627) 988-3100 Fax: (617) 727-7662 Website: www.mass.gov/dhcfp Publication Number: 09-177-HCF-01 Authorized by Ellen Bickelman, State Purchasing Agent Printed on Recycled Paper

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