Hospital profits, a misleading measure of financial health

Over the 1984-1988 period, Massachusetts hospitals complained that operating revenues, regulated by state and federal governments, were inadequate and caused significant declines in profitability. Poor profitability provided a persuasive basis for hospitals' successful lobbying for additional revenues, as well as the rationale for laying off workers and reducing unprofitable programs serving community needs. However, an alternative approach to measuring hospital financial health in the state indicates that the industry was healthy enough to significantly expand capital assets and to accumulate hundreds of millions of dollars of discretionary cash. More effective measures of financial performance are needed to inform policymakers and analysts of the financial health of hospitals. Analysis of cash flow statements provides important insights for proper interpretation of income statements and balance sheets.