Moody's: Not-for-profit hospital margins fall to 2.2%

Expenses outpace revenue growth for a second year

Expenses continue to outpace revenue growth at not-for-profit hospitals, causing operating margins and cash flows to drop across the industry, according to new medians released by Moody's Investors Service

Moody's hit a new downgrade record in 2012

The medians—which are preliminary—draw on audited fiscal year 2013 financial statements for nearly 45% of Moody's  portfolio of 448 not-for-profit hospitals and health care systems. The data show that the providers' expenses increased at an annual rate of 4.6%, outpacing their 4.1% annual revenue growth. As such, operating margins and operating cash flow margins declined across the sector; the median operating margin fell to 2.2%.

The declines "come after several years of growth or stability in profitability," Moody's analyst Jennifer Ewing wrote in the report. The trend is likely indicative of cost-containment strategies employed by many hospital operators, as well as a continued shift to lower-cost outpatient settings.

Moody's also pointed out that minimal rate increases from commercial payers on top of rate cuts from Medicare and Medicaid likely affected performance. The number of high-deductible health plans, which impose larger financial obligations on patients, also increased in 2013. This can often lead to more bad debt for hospitals and lower margins, Moody's pointed out.

Why Moody's remains pessimistic about U.S. hospitals

But while cash flow grew more slowly last year, balance sheet ratios remained relatively stable, while unrestricted cash and investments grew because equity-market returns were strong and capital spending fell. Moody's anticipates that an upcoming analysis of calendar year-end audits after September 30, 2012, will also reveal healthy balance-sheet ratios (Moody's report, April 2014; Landen, Modern Healthcare, 4/23 [subscription required]).

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