Despite 'glimmers of stability,' Moody's predicts worsening financial outlook for nonprofit hospitals

Read Advisory Board's take: Why hospitals must adopt aggressive revenue growth strategies

Nonprofit hospitals will continue to see expenses outpace revenue in 2019, according to a new report from Moody's Investors Service, Alex Kacik reports for Modern Healthcare.

A bleak outlook

Moody's attributes the negative outlook for nonprofit hospitals to several factors limiting revenue growth, which include:

  • Weak volume trends;
  • Reimbursement compression;
  • An increase in Medicare beneficiaries; and
  • Rising bad debt loads.

Inpatient admissions are expected to remain poor, as 2017 saw just a median admission growth of 1%, the report said. Outpatient visits will also be weak, as median growth declined in2017, marking the first such decrease in five years. An increase in outpatient competition will also work to suppress margins, the report said.

Reimbursement rates are expected to remain in the low-single-digit range, according to the report, and that, coupled with the fact that bad debt levels are expected to grow to around 8% to 9%, will likely strain nonprofit hospitals.

Nonprofit hospitals are also expected to face financial repercussions from several policy-related matters, including:

  • Readmission penalties from CMS, which estimates that 80% of hospitals will incur penalties of up to 3% of their diagnosis-related group;
  • Site-neutral payments;
  • Capped 340B drug discount rate; and
  • Medicaid work requirements, as these requirements could lead to a decrease in Medicaid share funding, according to the report.

According to the report, hospitals have been doing a better job limiting expenses through staff cuts, increased productivity, and better supply cost budgeting, and as a result, total expense growth is expected to slightly drop from 5.7% in 2017 to about 4% to 5% in 2019. However, that will still overshadow the projected revenue growth of 3% to 4%.

Reaction

Diana Lee, Moody's VP, said that, despite "some glimmers of stability," the outlook for nonprofit hospitals "remains negative."

According to Lisa Goldstein, associate managing director for Moody's public finance group, "The margins are at some of the lowest levels that we have seen in a while, but that's more a function of expenses outpacing revenue."

Moody's in the report said that nonprofit hospitals will likely continue to pursue mergers to help with financial constraints. However, Goldstein added that it's unclear whether larger systems acquiring struggling ones can generate long-term savings.

"Day 1 integration is key to making these deals work," she said. "We've seen mergers go very smoothly; we've seen mergers over the years that have been wobbly coming out, and some have been very difficult" (Kacik, Modern Healthcare, 12/3).

Advisory Board's take

Yulan EganEmily Connelly

Yulan Egan, Practice Manager, Health Care Advisory Board, and Emily Connelly, Senior Consultant, Health Care Advisory Board

After three consecutive years of expense growth outpacing revenue growth, providers' margins are facing unprecedented pressure. At this point, moderately slowing cost growth is insufficient to protect margins when revenue growth is decelerating so rapidly. Given the need to rapidly correct course, we recently released the System Performance Diagnostic—a new quantitative tool exclusively for Health Care Advisory Board members—to help identify your biggest opportunities for improvement and map best practice resources.

“Downward revenue pressure is now eclipsing cost growth as the dominant force behind providers' margin challenge”

What is perhaps most concerning about this report? The projections that hospitals will continue to experience margin compression despite significant improvements in controlling the rate of expense growth. With revenue growth expected to reach its lowest point in the past decade, downward revenue pressure is now eclipsing cost growth as the dominant force behind providers' margin challenge.

Advisory Board's own illustrative modeling suggests that an average health system which successfully implements effective cost control strategies would still need to grow its revenue by an average of 4.6% each year to achieve a 3% margin by 2025—for a $1B health system, this would require $275M-$285M in total new revenue in addition to medical inflation. To achieve this sizeable goal, hospitals and health systems must develop a comprehensive approach to growth that includes strategies to improve revenue cycle performance, increase market share, and diversify revenue streams.

We're exploring these growth strategies—and others—at this year's Health Care Advisory Board National Meeting Series. Register now to learn how to: 

  • Prioritize the top avenues of growth;
  • Develop the service lines of the future;
  • Deploy a competitive Ambulatory Surgery Center strategy; and
  • Assess opportunities for topline revenue growth through specialty pharmacy.

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Next, learn how your health system can achieve true financial sustainability

In 2017, nonprofit hospital operating expenses outgrew revenue for the second year in a row. In fact, the gap between cost growth and revenue growth widened slightly from 1 percentage point in 2016 to 1.1 percentage points in 2017, driving median operating margins among not-for-profit hospitals to an all-time low of 1.6%.

Join the series to learn more about what's driving this margin compression and see case examples from organization's who have established organization-wide models for driving efficiency improvements.

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