Summary

New Orleans faces many challenges in the aftermath of Hurricane Katrina including the challenge of reestablishing the health care system and hospitals within the system. Hurricane Katrina, which made landfall on August 29, 2005, and the subsequent flooding caused by the failure of the New Orleans levee systems, resulted in the sudden closure, damage, or disruption in services at many of the New Orleans hospitals. On August 1, 2007, officials representing five New Orleans hospitals that have been the main health care providers in the region since the hurricane, testified before the House Committee on Energy and Commerce's Subcommittee on Oversight and Investigations. The officials stated that since the hurricane they have experienced significant operating losses and that they expect the losses to continue. The official from one of the hospitals that was designated to present an overview of the specific problems facing the five hospitals stated in his testimony that the hospitals expected to experience a combined operating loss of $135 million in calendar year 2007. This operating loss estimate was calculated using operating revenue and expense amounts for all five hospitals for January through May 2007 and then annualized for the year. The official also testified that the combined operating loss for the five hospitals would equal $405 million by 2009. The hospital official cited several reasons for operating losses, including increased labor costs and Medicare reimbursements that do not take into account the increased labor costs since the hurricane. The hospital official appealed to Congress for additional federal financial assistance. The subcommittee asked us to review the extent to which Hurricane Katrina adversely affected the hospitals' operating results. To that end, Congress asked us to analyze 1) the operating results of the five hospitals before and after Hurricane Katrina and 2) the factors contributing to changes in hospital operating results and whether those factors would have a continuing impact.

Operating results of all five hospitals significantly declined in 2005, the year of Hurricane Katrina, based on the three measures of profitability we used to illustrate differences in the hospitals' operating results before and after the hurricane--operating income or loss, net income or loss, and earnings before interest, depreciation and amortization. However, four out of the five hospitals showed some improvement in their operating results for 2006, 2007, and projected for 2008. For the fifth hospital, the amounts for the three profitability measures for 2007 and projected for 2008 declined from 2005 amounts. In viewing these trends, it is important to consider the amount and timing of special payments that the hospitals received to cover Hurricane Katrina-related losses for 2005 through 2008. These special payments included insurance payments from private insurers for business interruption and property and casualty claims, wage index grants from the Department of Health and Human Services (HHS) to cover some of the increases in labor costs experienced by the hospitals and funds from the state of Louisiana for uncompensated care to cover the increased costs for providing health care to the uninsured. They also included Federal Emergency Management Agency (FEMA) and National Flood Insurance Program (NFIP) reimbursements to cover losses due to flooding and federally declared disasters. Despite the improvements in operating results for four of the five hospitals we examined, the financial position for these four hospitals has weakened, as evidenced by declines in net asset balances since 2004. Such declines indicate that the hospitals have been either using their assets, incurring additional debt to support operations or both. Increased expenses have contributed to changes in hospital operating results since Hurricane Katrina. Increases in operating expenses have generally been greater than increases in operating revenues, thereby negatively affecting operating results. Hospitals have experienced higher labor costs since the hurricane. A nursing shortage and reduction in the physician base and workforce, exacerbated by the hurricane, forced hospitals to hire staff at salaries and wages that were higher than before the hurricane. Generally, revenue from patient services has not kept pace with increased expenses. Hospital officials believe that revenues will continue to lag behind expenses until some of the increased labor costs are covered in Medicare reimbursement rates through changes to the wage index. However, this relief is not fully expected until 2010. Like hospital officials, officials in LDHH believe that increased operating expenses contributed to the decline in hospital operating results and that labor costs were a major driver of decreased operating results. The state health officials developed an estimate and requested $50 million in funding that the five hospitals need to cover operating losses in 2007. Credit analysts with whom we spoke also cited the increase in labor costs as a factor. The analysts said that the decline in hospital operating results since Hurricane Katrina could be a factor in increasing the hospitals' costs of raising funds in the bond market.