considerably above the increase in the all-item Consumer Price Index. On the basis of a similar comparison, the CPI increased 11.0, or 6.4 points less than the average increase in the prices hospitals paid.

Some of the sources for the enormous rise in the index can be identified.

Components that placed particular upward pressure on the index were:

As has been suggested, the rate of increase of prices in the economy is expected to show a sizeable decline in 1975. This expectation can also be applied to the nonlabor input price index. At this juncture, however, it would be premature to venture an estimate of the extent of deceleration.

In sum,

factor prices (wages and nonlabor input prices) played a large role in hospital cost behavior in 1974. This is exemplified by the fact that they alone explain upwards of 70 percent of the overall rise in hospital costs.

The third section of this paper deals with recent trends in hospitals' fi

Hospital operating margins (revenue less expenses expressed as a percentage of revenue) showed considerable improvement last year. Displayed in Table 17 below are community hospital operating margins from 1968 to 1974.

The data show the erosion of the operating margin that occurred in both 1972 and 1973, and it is likely more than just coincidence that this phenomenon took place during the Economic Stabilization Program. However, in 1974 a

54-804 O - 75-8

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reversal in the downward trend of the operating margin took place. At 2.1 percent, the operating margin was nearly one point higher than in 1973.

Even with this increase, though, the operating margin last year was generally

The liquidity position of hospitals rose substantially in 1974. Displayed in Table 18 are current assets and liabilities in the industry as of December 1974 and December 1973.

During the period, the accumulation of current assets outstripped liabilities. In December 1974, total current assets increased 10.5 percent, compared to a 7.9 percent increase in current liabilities. A result of the disparate rates

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of change was a considerable increase in working capital (current assets In December 1974, working capital was $6.02

minus current liabilities).

billion, compared to $5.37 billion in the previous year.

There exists a number of noteworthy trends in the industry's current asset and liability position. Of the various accounts composing current assets, cash reflected the largest relative increase (16.2 percent). However, the near money asset of temporary investments decreased 3.5 percent during the period. Current liabilities behaved even more erratically. payable increased 25.6 percent, whereas notes payable decreased 28.6 percent. The behavior of notes payable may be traced to an adjustment in the short-term borrowing that occurred during ESP.

Accounts

Financial ratio analysis has been a popular tool of financial managers. Some of the more frequently used ratios are displayed below in Table 19 for the months of December 1973 and 1974

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The current ratio is calculated by dividing total current assets by total

current liabilities.

meet current debt.

The ratio measures the ability of current assets to Conventionally, the greater the ratio, the greater is creditors' expectation of prompt payment. The current ratio for community hospitals in December 1974 was 2.69. Thus, hospitals' ability to meet current debt had increased somewhat from the same period in 1973.

liabilities.

The acid test ratio is computed by dividing total cash by total current It measures cash available to meet current debt. In other words, it expresses the extent to which cash can meet the demands of creditors. This ratio was .20 in 1974, slightly higher than in 1973.

The accounts receivable composition ratio equals accounts receivable divided by total current assets. Generally, a "large" ratio indicates vulnerability to a possible increase in default on patient debt owed to hospitals. The accounts receivable composition ratio moved from .62 in 1973 to .63 in 1974.

The cash composition ratio is calculated by dividing cash by current assets. The higher the ratio is, the greater the immediate liquidity of the industry. Per this gauge, hospitals showed slightly greater immediate liquidity in 1974.

Collection Period

The rapidity with which hospitals collect revenue is an important statistic. The collection period, alternatively referred to as days of revenue in patients' accounts receivable, is a measure of this rapidity.

Because the

cost (foregone income of having relatively more days of revenue in patient accounts receivable) is sizeable, any decrease in the number of days must

be viewed as desirable.