PRINCETON – New Jersey hospitals saw a slight increase in their statewide operating margins for year-end 2011, only to have the benefit of those operational efficiencies washed away by a volatile stock market and required support of pension programs. Even with the aggregate operational performance showing improvement, one-third of New Jersey’s hospitals finished the year with a loss from operations.

The statewide average operating margin improved to 3.0 percent in 2011, compared to 2.3 percent in year-end 2010. However, the statewide total margin – which includes non-operating activity such as investment income and contributions to employee pensions – dipped dramatically from 4.7 percent in 2010 to 0.3 percent last year. The data is contained in the 2012 Financial Status of New Jersey Hospitals report, produced annually and released today by the New Jersey Hospital Association.

“New Jersey hospitals continue to face a delicate balancing act between their mission and their margins,” said NJHA President and CEO Betsy Ryan. “Their efforts to deliver high quality healthcare services while improving the efficiency of their operations are reflected in an improved operating margin. But they continue to confront an array of financial pressures that drag down other key financial measures.”

In this era of healthcare reform, hospitals are committed to reducing healthcare costs while maintaining access to quality healthcare. They also continue to face reduced payments for services, especially those from governmental payers such as Medicare, Medicaid and the state’s charity care program. Hospitals have engaged in aggressive cost reduction programs and have also embraced opportunities to work more collaboratively with other providers such as physicians and post-acute providers. The results of these cost containment programs have allowed for a modest increase in the statewide operating margin. However, New Jersey’s average still lags behind the rest of the country.

Hospitals, like other employers, are required to maintain the funding of their pension programs regardless of the performance of the investments that house their pension funds. Volatility in the investment market required hospitals to make additional pension contributions, which is reflected in the plunging total margin.

Those pressures are shown in other financial indicators from this year’s report:

• The average days cash on hand declined from 53.8 days in 2010 to 49.2 days in 2011.
• The average payment period increased from 73.1 days to 78.5 days.
• The return on equity ratio plunged from 12.6 percent in 2010 to 1.4 percent in 2011

“The New Jersey hospital system is a $20 billion-a-year cog in our state’s economy, and in most cases a hospital is the largest employer in a given community” said Sean Hopkins, senior vice president of health economics at NJHA. “With the fiscal cliff staring us straight in the face and a 2 percent Medicare cut set to kick in next month, our hospitals will have to remain focused and creative in their efforts to continue to deliver high quality care in a cost-effective manner. The pressure needle on hospital revenues is still pointing down for the foreseeable future.”