Hospital profit margins declined from 2015 to 2016, Moody's finds

Not-for-profit and public hospitals' median operating margin declined slightly in fiscal year (FY) 2016, according to a preliminary Moody's Investors Service report released Tuesday.

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The report is based on audited fiscal year financial documents from 150 hospitals and health systems.

Findings

Overall, the report found hospitals' median operating margin fell from 3.4 percent in FY 2015 to 2.7 percent in FY 2016. Median operating cash flow also declined, from $76.4 million in FY 2015 to $75.9 million in FY 2016, according to the report.

The report found that the hospitals' annual operating expenses outpaced operating revenues, with expenses growing by 7.5 percent last year, compared with a 6.6 percent increase in hospitals' annual operating revenues. The increase in the hospitals' expenses was largely driven by growth in spending on prescription drugs and labor expenses, according to the report. For instance, the report found that insurance gains made under the Affordable Care Act increased patient demand, meaning the hospitals had to employ more nurses, physicians, and technicians.

While the numbers show hospitals experienced "an overall softening in operating performance and liquidity measures relative to last year's medians," Moody's said  the hospitals' margins and liquidity "remain in-line with historical levels while demand trends remain generally positive."

But Beth Wexler, a vice president at Moody's, predicted that in the comping years hospitals' margins will experience increasing pressure as they spend more on prescription drugs and employee pensions and salaries. She added, "Revenue growth will also temper amid declining reimbursement from both private and governmental payers."

Further, the report stated that "uncertainty over federal health care policy also poses a strong headwind" for hospitals' financial performance (Diamond, "Pulse," Politico, 5/17; Nather, "Vitals," Axios, 5/17; Moody's release, 5/16; Moody's report, 5/16).

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