Healthcare Information Division - Financial Health of California Hospitals
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.
- OSHPD Data
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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.
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.
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- Chart 1
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This chart is similar to the "Hospital Financial Margins for the Last 4 Quarters" 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.
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- Chart 2
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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%.
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- Chart 3
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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.
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- Chart 4
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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.
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- Financial Ratio Definitions
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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).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.
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