Hospital Financial Performance - CA OSHPD

Hospital Financial Performance

This page displays various trends in hospital financial performance and provides
the user with a more in-depth look at how financial performance can be
measured and analyzed.

HOW IS FINANCIAL PERFORMANCE MEASURED?

Measuring hospital financial performance is commonly performed by analyzing
margins (I.e., the difference in revenue vs. expenses). Margins can be
expressed by using financial ratios and as dollar amounts. OSHPD uses two
financial ratios to measure a hospital’s financial performance. Both ratios
compare the revenue received by a hospital against its operating expenses. The
difference lies in what revenue items are included in each ratio formula. OSHPD
also looks at the number of hospitals operating at a “profit” or “loss” for each of
these financial ratios.

FINANCIAL RATIOS

Operating Margin – The operating margin is the most commonly used financial
ratios to measure a hospital’s financial performance. It compares a hospital’s
total operating revenue against its total operating expenses, often referred to as
net from operations. If total operating revenue exceeds total operating expenses,
the hospital is operating at a profit and will have a positive operating margin;
whereas, if total operating revenue is less than total operating expenses, the
hospital is operating at a loss and will have in a negative operating margin.

Operating Margin Formula: (Total Operating Revenue – Total Operating
Expenses) / Total Operating Revenue

Total operating revenue is the sum of net patient revenue and other operating
revenue, where:

Net patient revenue is the amount received or expected to be received
from third-party payers (insurers) and patients for hospital services
provided. Net patient revenue includes the payments received for routine
nursing care, emergency services, surgery services, lab tests, etc.

Other operating revenue is the amount received from non-patients for
services related to hospital operations. This includes items such as
cafeteria sales, refunds on purchases, vending machine commissions,
parking lot revenue, etc. Since other operating revenue typically
comprises between 2% to 4% of a hospital’s total operating revenue, it
often determines if a hospital’s operating margin is “in the black” (profit) or
“in the red” (loss).

October 2011

Total operating expenses include all expenses associated with operating the
hospital, such as salaries, employee benefits, purchased services, supplies,
professional fees, depreciation, rentals, interest, and insurance. It does not
include bad debts or income taxes.
Total Margin – This ratio compares a hospital’s net income against its total
operating revenue. Whereas the operating margin looks only at revenue derived
from operations, total margin includes all other sources of revenue and expenses
that are not related to operations.
Total Margin Formula: Net Income / Total Operating Revenue
Net income (AKA “Bottom Line”) is the excess of revenue over expenses. The
key difference from the operating margin is that the total margin factors in non-
operating revenues and expenses, the provision for income taxes, and any
extraordinary items. Total margin may differ significantly from the operating
margin if substantial amounts of non-operating revenue or expenses are
reported.
Non-operating revenue is the amount received from non-patients which do not
relate to hospital care. Examples of non-operating revenue include investment
income, unrestricted contributions, medical office building revenue, gift shop
revenue, and governmental appropriations (public hospitals only). Non-
operating expenses include the costs incurred related to producing non-
operating revenue, such items as medical office building expenses, gift shop
expenses, and loss on sale of hospital property.
OSHPD Data: OSHPD Hospital Annual Financial Disclosure Reports and
Quarterly Financial and Utilization Reports were used to produce these trend
reports. The table below shows the number of hospitals by type of care and by
type of control for the last five years.

October 2011

Financial data related to the Kaiser hospitals, State hospitals, Psychiatric Health
Facilities, Shriners Hospitals, and LTC Emphasis hospitals are excluded from
these charts because their data lack comparability. For example, the Kaiser
hospitals do not report revenue for individual hospitals and the Shriners hospitals
do not report revenue because they do not charge patients for services. Further,
net patient revenue reflects any transfers of disproportionate share payments
back to a related public entity.

October 2011

Hospital Financial Margins for the Last Four Quarters

This chart compares the operating margin and total margin for all hospitals during
the last four quarters based on the most recently submitted quarterly financial
disclosure reports, and will be updated quarterly. Both margins are above the 12
quarter average.

October 2011

This chart is similar to the previous chart, but expands the timeline to five years
and uses annual financial disclosure reports instead of quarterly financial
disclosure reports. The chart clearly shows that each financial ratio produces
different results, with total margin being more volatile. Because total margin
includes income from investments, the large decrease in 2008 was not
unexpected.

October 2011

This chart shows the percent of hospitals reporting a negative operating margin
and total margin. From 2006 to 2010, the number of hospitals reporting a
negative operating margin decreased from 45.2% to 33.9%, with a five-year
average of 40.5%. In 2010, 22.4% of hospitals reported a negative total margin
compared to the five-year average of 31.1%.

October 2011

This chart expresses hospital financial performance in dollar amounts from two
perspectives – Net from Operations and Net Income. Net from Operations is
determined by subtracting total operating expenses from total operating revenue,
which is basically the operating margin displayed in dollars. Net Income is used
to calculate the total margin and includes the net effect of non-operating
revenues and expenses, income taxes, and extraordinary items. Both figures are
reported on the hospital’s Income Statement.
Net from Operations increased from 2006 ($275.2 million) to 2008 ($398.7
million), followed by substantial increases in 2009 ($1.32 billion) and 2010 ($1.86
billion). Net Income increased from 2006 ($2.98 billion) to 2007 ($3.57 billion),
and then decreased in 2008 ($2.05 billion) before increasing in 2009 ($2.54
billion) and 2010 ($4.14 billion). Some of the increase in 2010 is attributed to the
Quality Assurance Fee program enacted by AB 1383 (Chapter 627, Statutes of
2009), which provided additional Medi-Cal supplemental revenue.

October 2011

As described earlier, changes in non-operating revenue could have a major
impact on a hospital’s net income (total margin). The chart illustrates the
financial impact that the economy has on hospital financial performance.
Investment income in 2007 was $1.05 billion before showing statewide aggregate
losses in 2008 ($134.1 million) and 2009 ($303.1 million). Investment income in
2010 was $757.68 million.

October 2011