The Journal of Science and Business Research

A Brief Analysis of How the Number of Medical Practitioners

Affects the Profitability of Rural Healthcare Enterprises

Sam J. Allen, MBA, FACHE

Introduction

Access to healthcare in rural areas continues to be one of the great American health care challenges. In spite of the fact that the Medicare designation of Critical Access Hospital¹ now reimburses facilities with that classification at 101% of cost², many small rural facilities find themselves surviving only at a break-even level, with needed equipment and infrastructure upgrades far out of reach. This brief study was designed to discern whether the number of medical practitioners³ in a community had an impact on the profitability of the organization, and if so, how.

It is recognized that this study does not meet the rigors of scientific scrutiny – a number of aspects of the study are patently "unscientific." However, it was not designed to be a rigorous process, but rather a "quick and dirty" analysis to assist with a single decision concerning the recruitment of an additional physician into a single rural community. With that in mind, the study answered the question for which it was designed, and provoked other questions in the process.

Study Parameters

A number of critical access hospitals in Montana were asked to supply specific information about their organizations, including:

• The corporate structure of the organization, including how the organization selects its Board members.

• Whether the organization receives any public support in the form of tax-generated monies, and if so how much.

• Demographic information about the size of the hospital and any attached nursing facility, the size of the town,

and the size of the service area.

• Information concerning the number and type of professional medical providers serving the community, and

their employment relationship with the organization, if any.

Of these, fifteen (15) non-profit 501(c)(3) organizations responded and were studied. In addition to the information obtained as above, the latest Internal Revenue Service Form 990 available for each organization above was accessed from public sources.

A number of standard indicators were calculated for each facility, and the results compared.

Findings

The organizations in the study range in size from 6 to 25 beds (hospital), plus 0 to 70 beds (nursing home). The average of all organizations is 14 hospital beds and 24 nursing home beds.

Four hospitals do not receive any financial support from their counties or from a hospital district. All four of these hospitals made a significant positive margin, the average being $500,500. The average service area population of this group was 4,825 persons.

Average size = 35 beds total

Average providers/1000 population = 2.1

Average revenue/bed = $14,721

Average revenue/1000 population = $103,731

Six hospitals that do receive financial support from their counties or from a taxing district also made a positive margin. These hospitals received an average of $57,143 per year from their public sources, and their average margin was $205,000 after the public support payments were subtracted from their net incomes. The average service area population of this group was 3,571 persons.

Average size = 41 beds total

Average providers/1000 population = 1.1

Average revenue/bed = $6,328

Average revenue/1000 population = $73,400

Four hospitals demonstrated a financial loss. All four received an annual support payment of some kind from their county or district. The average loss of these 4 was $170,000. An additional hospital had a very small positive margin, and received money from its county. When the support amount was subtracted this fifth hospital had a substantial loss, so it was grouped with the other hospitals posting a loss. The average loss of the 5 hospitals was $384,750 after their support payments were subtracted. These hospitals received an average of $240,500 per year from their public sources. The average service area population of this group was 4,575 persons.

Average size = 37 beds total

Average providers/1000 population = 0.7

Average revenue/bed = ($3,952)

Average revenue/1000 population = ($31,530)

Discussion

In spite of the fact that there was significant variation, it is evident that the number of professional medical providers in a service area is positively correlated with the profitability of the hospital organization. The grouping of hospitals that had the largest positive net margin tended to have the most medical providers. Conversely, the grouping of hospitals demonstrating net financial losses tended to have fewer providers.

Figure 1

Figure 1 shows profitability graphed against the number of providers. It is of note that this graph only includes 14 of the 15 organizations studied. One organization, having a net profit of $340,000 had an incredible 10 providers per 1,000 population. That organization is not demonstrated on the graph, for clarity sake.

Note that the graph shows two linear-regression trend lines. The pink trend line is the linear regression of the 14 organizations shown on the graph. This trend line indicates that an organization with 1.03 providers per 1,000 persons of population should financially break even. This is generally consistent with the demonstrated results of the grouping of hospitals making the smaller profits. The correlation coefficient of this line is 0.418.

The green trend line is the linear regression of all 15 organizations (including the one with 10 providers per 1,000 population, that is not shown.) This trend line is somewhat steeper than would be expected from the results of the grouping of hospitals making the larger profits. The 2.1 provider per 1,000 population level on the trend line would predict a profit of $300,000, while in actuality the group averaged well over $500,000.

For all practical purposes, a conservative approach would indicate that slightly more than 1 provider per 1,000 persons of service-area population is required for an organization to financially break even, and incrementally more providers allow the organization to become profitable. The variability within the data also clearly demonstrates that many other factors are at work here, as well.

Conclusion

Without regard to the variability from factors other than the number of medical providers, it is clear that the number of providers does play a major role in determining the profitability (or lack thereof) of many small rural hospitals in Montana. The critical threshold appears to be slightly over 1 provider per 1,000 persons of population. Organizations that have more than the threshold level are more likely to be financially stable than are organizations that have fewer providers.

Clearly, much more study would be required to define what the other factors that contribute to financial success are, much less their effect. However, the results of this simple review should prompt some discussion, particularly about the appropriateness of policy decisions that might support or detract from providers choosing to practice in rural areas.

And if nothing else, rural health care organizations wishing to achieve financial solvency should be encouraged to make the appropriate commitments to keeping medical practitioners in their communities.

References and Notes

1) The definition of a "Critical Access Hospital" may be found in Medicare regulations: 42 CFR 485 http://www.access.gpo.gov/nara/cfr/waisidx_04/42cfr485_04.html

2) Detailed information on the reimbursement of Critical Access Hospitals

may be found in the Medicare regulations: 42 CFR 314

http://www.access.gpo.gov/nara/cfr/waisidx_02/42cfr413_02.html

3) The term "provider" is used generically, and includes physicians, advanced practice registered nurses (nurse

practitioners), and physician assistants. The number of practitioners deemed to be available for this study

included providers regularly practicing in that town, but not including providers in occasional clinics, or

practitioners only covering the emergency room. The group ranged from a low of 0.55 provider/1000

population, to a high of 10 providers/1000.

4) The "net income" of each organization was calculated to be that organization’s net excess (deficit) revenue

exhibited on Form 990, less the governmental support (county or district) amount reported by the CEO to have

been received. For the purpose of this analysis, no exception was made for extraordinary income or expenses of

any organization. For example, Intergovernmental Transfer (IGT) money may or may not have been available to,

and/or used by any specific organization. Similarly, one hospital noted having received a sizable "donation" for

a specific purpose, that showed up as both income and then the accompanying expense that clearly had nothing

to do with hospital operations. It was determined that it would be impossible to account for all such variations.

About the Author:

Sam J. Allen holds a Master of Business Administration Degree from the University of North Texas, and is a Fellow in the American College of Healthcare Executives. He owns his own consulting practice, specializing in the strategic positioning of health care organizations, including focusing those strategies on community expectations, and interim organization management including financial turn-around strategies. Sam may be contacted at: isolationarticle@sbrjournal.net

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