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COPYRIGHT 2007 American College of Healthcare Executives
EXECUTIVE SUMMARY
Freestanding hospitals are becoming less common as more hospitals are joining or establishing relationships with multihospital systems. These associations are driven by factors, such as unrelenting competition in local markets, aging physical plants, increasing labor costs, and higher physician fees, that place a high demand on financial assets. Despite these factors, many freestanding hospitals continue to do well financially, showing increases in total profit margins and total cash flow margins. This article examines which market, management, financial, and mission factors are associated with freestanding hospitals with consistently positive cash flows, relative to those without consistently positive cash flows.
The study sample consisted of freestanding, nonfederal, short-term, acute care general hospitals with more than 50 beds and three years of annual cash flow data. Data were taken from the annual surveys of the American Hospital Association, the cost reports of the Centers for Medicare and Medicaid Services, and the Area Resource File of the Health Resources and Services Administration. The data were analyzed using logistic regression to identify those factors associated with a consistently positive cash flow.
Freestanding hospitals with positive cash flows were found to have a greater market share and to be located in markets with a higher number of physicians and fewer acute care beds; to have fewer unoccupied beds, higher net revenues, greater liquidity, and less debt on hand; and to treat fewer Medicare patients than those without a positive cash flow. The findings suggest that these hospitals are located in resource-rich environments and that they have strong management teams.
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In contrast to large multihospital systems, freestanding hospitals are vulnerable to market and management risk factors that can influence their financial performance. From a market perspective, freestanding hospitals can serve a single geographic market, which exposes them to variation in competition and changes in local economic conditions. From a management standpoint, freestanding facilities might offer a limited range and mix of services and depend on a specific group of physicians.
Recent credit-rating financial data indicate that these facilities are performing well financially. In 2005, Standard & Poor's (S&P) A-rated bonds of freestanding hospitals experienced an increase in total profit margin from 3 percent in 2004 to 4.4 percent in 2005, and their cash flow margin rose from 9.9 percent in 2004 to 11.5 percent in 2005 (S&P 2006). S&P analysts claim that the upward trend in these two performance measures stems from increases in rates from commercial health plans, an upward trend in volume for selected markets, and better control of their nurse labor costs. However, this descriptive analysis reflects only a selected sample of freestanding hospitals that had their bonds rated by the credit-rating agency. In addition, prior research has focused on the performance of hospitals affiliated with multihospital systems (Mark 1999; Menke 1997). However, little if any empirical research has been conducted on a larger, more representative sample of freestanding hospitals that have consistently demonstrated a strong financial performance over time. Therefore, the aim of this study was to gain insight into the driving factors behind freestanding hospitals with positive cash flow. Specifically, the study attempted to identify what underlying market, management, and financial factors are associated with freestanding hospitals with consistently positive cash flows relative to a comparison group of freestanding hospitals that did not have consistently positive cash flows.
A study of this nature can help board members, policymakers, credit analysts, and bond insurers acquire a better understanding of the contributing factors that allow these financially strong, freestanding facilities to operate independently. For example, how do external market factors, such as market share and the ability to pay for health services, contribute to their financial performance? In addition, the study can help stakeholders understand whether internally controlled management factors, such as payer mix, bed size, patient services, staffing levels, liquidity levels, and debt...
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