The median profit margin of U.S. hospitals increased from near zero in the third quarter of 2008 to more than 8 percent in the second quarter of 2009, according to an analysis of hospital financial performance published Nov. 9 by Thomson Reuters.

The recovery has been broad-based, with all classes of hospitals—small, medium and large community hospitals, teaching hospitals and major teaching hospitals—showing positive median margins, according to the report.

The research tracked two dozen financial indicators, using proprietary and public data to dissect the balance sheets of more than 400 U.S. hospitals. It evaluated trends in revenue and profit, employment levels, closures, inpatient volume, days cash on hand and case mix to gauge the fiscal health of the hospitals.

The following are the findings of the analysis:

• Total margins increase: Median total margins were at 0.37 percent in the 2008 third quarter. In the 2009 second quarter, they reached 8.4 percent.
• 20 percent of hospitals still in the red: About 20 percent of hospitals had negative total margins in the 2009 second quarter, which is similar to the rate seen before the recession began in late 2007. This is an improvement from the first quarter 2009 when 30 percent of hospitals were operating with negative margins and the 2008 third quarter, when half of U.S. hospitals were operating in the red.
• Liquidity improves significantly: Allaying fears of a hospital credit crunch, hospitals' median days cash on hand has increased significantly from 90 days in the first quarter 2009 to 146 days in the 2009 second quarter, which is higher than the historic long-term average.
• Labor costs cut by reducing length of stay: While hospitals have maintained a consistent ratio of staffing levels per occupied bed throughout the recession, total labor costs are down approximately 2.25 percent in the the 2009 second quarter. This reduction in labor expense per discharge has been achieved by a reduction in the patient length of stay.
• Hospital admissions increase: Mean patient discharge volumes for all hospitals began declining shortly after the recession started, but moved into positive territory in the 2009 second quarter.

Also, the researchers found that large community hospitals, which were heavily impacted by declines in the financial markets in 2008, experienced dramatic improvements with only 8 percent of hospitals operating with a negative total margin in the second quarter of 2009.

"U.S. hospitals are on track to come out of the recession in better financial shape than they were in when the downturn began," said study author Gary Pickens, PhD, chief research officer at Thomson Reuters. "When we published our first analysis of hospital economic health in the fall of 2008, hospitals were facing unprecedented economic stress and staring down a real crisis. Now, by taking aggressive measures to reduce costs, the majority of hospitals are positioned for a strong recovery."