The Study
Download the full study here. PDF, 9 Megabytes.
Executive Summary
The 2009 Community Hospital Replacement Study (CHRS) advances the current state-of-the-industry knowledge base regarding replacement hospital project strategy, design, finance, and execution. A total of 72 full-service community hospitals replaced between 2000 and 2007 were analyzed for the CHRS.
Of the replacement projects studied in the CHRS: 25 are independent non-profit hospitals, 17 are owned by for-profit systems, and 30 are owned by non-profit systems. Thirty-five CHRS projects occurred in Certificate of Need (CON) states and 53 of the 72 CHRS projects are “greenfield” replacement projects. The CHRS includes 34 replacement projects between 25 and 99 beds, 20 between 100 and 199 beds, and 18 with 200 beds or more.
CHRS hospital service areas (HSAs) and projects defy expectations. HSA demographics, payer mix, and market structure did not predestine the financial or operating performance of replacement hospital projects.
For instance, 38 of 72 CHRS HSAs had 2007 median household incomes below the US median. Thirty-four CHRS HSAs had population growth rates (2000 to 2007) that were lower than the US average– in fact, 13 CHRS HSAs had declining populations. When assessing the 2007 ratio of commercial insurance covered lives to Medicaid and self-pay covered lives, a clear majority of CHRS projects outperformed the national average with 45 of 72 CHRS HSAs having higher scores than the nation at large. While a better payer mix score translated into higher median pre-replacement operating margin, the same could not be said post-replacement. A similar pattern exists regarding market leadership as measured by Medicare market share.
CHRS projects compared favorably to national averages on operating revenue growth per adjusted discharge, total annual operating revenue growth, and staffing efficiency before, during, and after replacement. Performance on operating expense growth per adjusted discharge was variable relative to the national average, in part due to increased interest and depreciation expense associated with large capital projects.
Operating margin is a useful measure of operating performance because it includes the impact of both fixed and variable costs. Median CHRS performance was above the national average for all but the year of replacement and the first year post-replacement. Once volume gains, revenue growth, and operating efficiencies were realized, median CHRS operating margins again exceeded the US average beginning in year 2 even with higher interest and depreciation expense. Median operating margin performance continued to improve relative to the US average in years 3 and 4.
The median increase in square feet per bed for CHRS projects was 716, a 40% increase from pre-replacement levels. Median operating revenue per square foot dropped during replacement and did not recover to pre-replacement levels until year 2. In contrast, median operating revenue per bed increased steadily across pre-, year 0, and post-replacement years, producing a 99.4% increase from year -3 to year 3. Median CMI adjusted discharges per bed experienced more modest growth of 44.8% over the same time period. For each of these metrics, there was significant variance in performance by system cohort (independent, for-profit system, or non-profit system).
Cumulatively, CHRS projects experienced median CMI adjusted growth in adjusted discharges of more than 29% from year -3 to year 3, with nearly 80% of that total occurring during year 0 and later. Operational efficiency for CHRS projects, as measured by median CMI adjusted average length of stay and median CMI adjusted full-time equivalents (FTEs) per 100 adjusted discharges, improved overall by year 3 after an adjustment period post-replacement. There was considerable variance in median performance on these metrics by system cohort.
Median CMI adjusted operating expense per adjusted discharge experienced a 27.2% increase for a compound annual growth rate (CAGR) of 4.1% from year -3 to year 3. Median CMI adjusted non-capital operating expense (less depreciation and interest expense) per adjusted discharge grew 12.5% over the same period for a CAGR of 2.0%. Also, CMI adjusted operating revenue per adjusted discharge grew by 30.8% from year -3 to year 3 for a CAGR of 4.6%. For-profit systems consistently generated greater CMI adjusted operating revenue per adjusted discharge than either independent hospitals or non-profit systems.
Median cumulative growth in operating revenue was 71.9% from year -3 to year 3. Across system cohorts, median cumulative growth in operating revenue was remarkably uniform. Concurrent with this robust growth in operating revenue, median EBIDA margin increased markedly post-replacement from pre-replacement levels.
Median operating margin for CHRS projects decreased during the year of replacement. After this decline, median operating margin did not rebound to pre-replacement levels until year 2.
Post-replacement CHRS project performance, as measured by CAGRs, improved upon pre-replacement performance for operating revenue growth, operating revenue per bed, CMI adjusted operating revenue per adjusted discharge, CMI adjusted FTEs per 100 adjusted discharges, CMI adjusted average length of stay, CMI adjusted operating expense per adjusted discharge, and CMI adjusted non-capital operating expense per adjusted discharge. Only post-replacement operating revenue growth per square foot was fat when compared to pre-replacement trends due to a median 40% increase in square feet per bed.
While there was variability in post-replacement results, most replacement projects improved upon pre-replacement operating and financial results. For projects where cost report data are complete and two years of post-replacement performance is available, CHRS analyses found that, from year -1 levels to years 2 or 3, 42 (87.5%) of 48 projects experienced growth in adjusted discharges and 19 (76%) of 25 experienced improved EBIDA margin. Significantly, 18 (72%) of 25 experienced improved operating margin from year -1 levels, even with higher interest and depreciation associated with the replacement facility.
Contact:
Jeff B. Sommer
CHRS Director
Phone: (207)221-8255
jsommer@stroudwaterassociates.com
Melissa P. Lin
Consultant
Phone: (207)221-8273
mlin@stroudwaterassociates.com
Download the full study here. PDF, 9 Megabytes.
