August 23, 2017

Margins are getting tighter in the not-for-profit hospital sector, Moody's says

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    The not-for-profit providers in fiscal year (FY) 2016 saw expenses grow faster than revenue, reversing a recent trajectory, according to a new report from Moody's Investors Service.

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    For the latest report, which describes the not-for-profit and public health care sector as having a stable outlook, the ratings agency reviewed the financial performances of 323 hospitals and health systems, representing 81 percent of all Moody's-rated health care entities.

    Findings

    The report found that after several years of restrained costs, in FY 2016 the sector's annual expense growth rate of 7.2 percent outpaced its annual revenue growth rate of 6 percent. The report attributed the increase in expense growth to rising pension contributions, labor costs, and pharmaceutical costs. The report also noted that the shift to value-based payment models and outpatient care settings contributed to the slower revenue growth rate.

    Moody's also found that for the first time, net outpatient revenue (50.5 percent) outpaced inpatient revenue (49 percent) among Moody's-rated hospitals. The report found outpatient visits grew by 4.5 percent and outpatient surgeries grew by 3.5 percent, outperforming inpatient growth rates. The inpatient growth rate, meanwhile, slowed from 3.1 percent in 2015 to 2.4 percent in 2016. The report attributed that slowdown to the uninsured population stabilizing following the Affordable Care Act's coverage expansions.

    In addition, the report found:

    • Unrestricted cash and investments grew modestly by 5.7 percent to $435.8 million, down from a 11.2 percent growth rate in 2013;
    • Absolute operating cash flow fell by 4.5 percent;
    • Operating margins and operating cash flow margins fell from 3.5 percent and 10.3 percent in 2015 to 2.7 percent and 9.3 percent in 2016, respectively;
    • Excess margin, a measure of total profitability, fell from 6.1 percent in 2015 to 5.6 percent in 2016.

    Beth Wexler, a Moody's vice president, said, "Higher expenses coupled with positive, albeit slower, revenue growth, contributed to lower profitability, tempered liquidity growth, and moderation of nearly all financial metrics," adding, "Tighter margins will weigh on the sector going forward."

    Hospitals could seek more partnerships, industry analysts say

    Industry analysts said the trends could prompt smaller hospitals and health systems to actively seek new joint ventures and partnerships, Modern Healthcare reports.

    Ken Marlow, chair of the health care department at the law firm Waller Lansden Dortch & Davis, said, "What we are seeing is a number of stand-alone independent hospitals coming to the realization that the state of the health care industry is such that it will be more difficult to operate in the future." He added, They are recognizing that one of the ways to best position themselves is to have economies of scale, decrease expenses and gain better reimbursement levels and rates with payers by joining bigger systems."

    Valerie Breslin Montague, a partner at the law firm Nixon Peabody, said independent hospitals and smaller health systems increasingly are facing competition from outpatient services offered by large provider practices and ambulatory surgical centers. "While some stand-alone hospitals and smaller systems have been able to succeed without joining a larger health system, this report illustrates how hard it is, and likely will be, to continue to do so," Montague said (Commins, HealthLeaders Media, 8/21; Sanborn, Healthcare Finance, 8/22; Kacik, Modern Healthcare, 8/22; Diamond, Politico, "Pulse", 8/22; Moody's release, 8/21).

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