Medical Device Daily

If there is one industry that shouldn't be affected by the recent economic turmoil, one would think it would be the healthcare industry. After all, there is still a demand for services people haven't just stopped becoming ill because of the sagging economy.

If anything, demand has increased and, unfortunately, the resources and financial capital that many hospitals and healthcare institutions once had at their disposal have diminished.

According to a report commissioned by Thomson Reuters (New York), the median profit margin of hospitals in this country has fallen to 0%, largely fueled by a decline in non-operating revenues, and mounting financial strains.

The study tracks 24 key financial indicators, using proprietary and public data to analyze the balance sheets of more than 400 hospitals nationwide. In doing this the study goes over trends in revenue and profit, employment levels, closures, inpatient volume, reimbursement rates, and frequency of elective medical treatments to gauge the fiscal health of the nation's hospitals.

These included revenue and profit, or total margin for non-profit hospitals, employment levels, closures, inpatient volume, reimbursement rates, and frequency of elective medical treatments. It found:

"Hospitals are facing unprecedented economic stress and many of the indicators we're seeing suggest that things will get worse before they get better," Gary Pickens, chief research officer for the Healthcare business of Thomson Reuters and lead author of the study, told Medical Device Daily. "While operating margins are generally holding steady, non-operating margins have all but disappeared from hospital balance sheets. That makes it difficult for hospitals to secure financing for new equipment and to fund expansion efforts."

"The key metrics we're watching most closely right now are operating margins and frequency of elective procedures," Pickens added. "If they start to slip, it may usher in a host of contagion effects. Half of [ the hospitals in the study] are operating in the red."

He added that while operating margins are generally holding steady, non-operating margins have all but disappeared from hospital balance sheets. This could make it very difficult for hospitals to get funding for new equipment and for expansion efforts.

Following are the key findings of the analysis:

Growth in Reimbursement Rates Shrinking: Payments hospitals received from Medicare, Medicaid and private insurers were growing at a declining rate through the end of 2008.

Credit Crunch: Hospitals' median cash-on-hand reached an historic low in 3Q08, demonstrating the impact of the credit crisis on liquidity. There was great variability in the median value of 110 days-cash-on-hand seen at that time from 57 days for the lowest quartile of hospitals to 203 days for hospitals in the highest quartile.

Stable Operations: Potential recessionary impacts that are not yet seen in the data include bed closures, mass layoffs, declining patient volumes, or a decline in elective procedures.

The report said there had been no indications of bed closures, mass layoffs, declining patient volumes or a decline in elective procedures.

As a result med-tech companies are gearing up for potential shortfalls as a result of hospitals spending less on devices.

Joe Kiani, CEO of Masimo (Irvine, California), spoke briefly about hospital shortfalls' possible impact to his company during a webcast hosted by BMO Capital Markets (New York) yesterday.

"Our worry stems from the fact hospitals have put off capital purchases," Kiani said. "The other side is that hospitals are getting more uninsured patients. They are also losing monies from endowment funds because of the market. What we've seen is that hospitals have gone from rational exuberance to irrational fear."

He added that there was no real way to predict what could happen, since there has never been a time in recent history where the economy has been in such bad shape.

But there are some bright spots.

Pickens pointed to a recent study published in the New England Journal of Medicine that showed large geographical variations in spending on medical procedures around the U.S. with little difference in outcome a study that suggested it is possible to spend less and still help patients.

"They're going to have to cut costs," Pickens told MDD. "Demand isn't decreasing, so they're not going to be doing any massive layoffs. The investments that hospitals used to have just [aren't] there anymore."

He said to cut costs the hospitals are going to have to become more efficient.

"The positive side is there is a great deal of efficiency that can come from this," Pickens said. "Providing poor care costs a lot of money so hospitals are going to have to maintain a high level of quality."

Another positive note is President Barack Obama's $789 stimulus plan, of which nearly $87 billion will go toward funding Medicaid. The plan would help insure that payments to hospitals aren't lowered any further.

Pickens warned that every bit helps, but that the indicators from the study show that before things get better, they will get worse.

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