Moody’s Investors Service analysis of the 2013 not-for-profit preliminary medians shows “continuing operating pressures” in the industry. Operating margins and operating cash flow margins dropped as revenue growth continued to slow and expense growth continued to surpass revenue growth. Debt coverage metrics remained stable and balance sheet measures grew despite weaker operating performance.
The authors highlighted these findings:
Median operating margins and operating cash flow margins declined, reflecting continued operating pressure on not-for-profit hospitals. The declines in both margins come after several years of growth or stability in profitability.
The margins dropped because expense growth outpaced revenue growth, and because of a decline in performance. Performance changes were caused by to a number of factors including:
- Low rate increases from commercial payers and rate cuts from Medicare and Medicaid
- A payer mix shift to governmental payers from commercial payers
- An increase in high-deductible health plans with higher levels of patient responsibility contributing to increases in bad debt and lower healthcare demand
- A shift to lower reimbursed outpatient visits and observation stays from inpatient admissions.
Median expense growth outpaced median revenue growth for a second year contributing to the drop in margins.
The median annual expense growth rate declined, signaling a focus on cost containment among hospitals and the shifting of care to a lower-cost and more efficient setting. The revenue growth rate, however, declined at a faster rate than the expense growth rate.
Unrestricted cash and investments grew as equity market returns were strong and capital spending levels decreased.
The median unrestricted cash and investments increased in FY 2013 compared to FY 2012. The authors noted that this growth “is consistent across all rating categories,” as equity market returns were strong and capital spending levels declined. Cash increased, resulting in an increase in preliminary median days cash-on-hand. However, median cash-to-direct debt remained relatively stable.
Moody’s will publish the final FY 2013 medians in the summer. The preliminary medians differ from the full medians in some important respects. Most significantly, the preliminary medians consist mainly of audits ended June 30, 2013 and before, with a smaller number of audits ended September 30. The final medians will include about 60 percent of audits ended after June 30. The authors wrote that they expect the final medians to show weaker operating performance because more hospitals will be included in the analysis.
(Source: Profitability and Revenue Growth Drop in US Not-for-Profit Hospital Preliminary Medians: Operating Performance Pressure Continues as Predicted; Balance Sheet Measures Remain Stable, Moody’s Investors Service, April 2014)
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