Preliminary Medians for 2013 Show Decline in Profitability

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)

 

 

iProtean subscribers, Part Two of the advanced Finance course, Strategic Responses to the Competitive Environment, will be published in your library by the end of June. If you enjoyed Part One, you should look forward to a continuation of the details offered by Michael Irwin and Dan Grauman. Topics include the competitive impact of consolidation/M & A activity, the next phase of mergers and acquisitions, the impact on bond ratings and taxable vs. tax-exempt bonds.

 

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Analysis Shows Hospitals Have Returned to Pre-Recession Status

Hospital financial performance generally returned to pre-recession status by 2011, according to a report published in Health Affairs. The research examined financial performance of nearly 3,000 acute care hospitals from 2005 through 2011.

 

“Hospitals that were strong financial performers before the recession remained strong during the study period, while hospitals that were financially weak remained weak,” the study’s authors wrote.

 

Total margins for hospitals with positive margins as well as hospitals with negative margins at the beginning of the study period fell in 2008, but had recovered by 2011. However, operating margins for hospitals with negative operating or total margins generally declined throughout the study period. The authors of the study attributed the rebound in total margins to increases in non-patient care revenues.

 

Although earlier research suggested that safety net hospitals (defined based on the proportions of Medicaid patients) may have benefited from the recession because they received stimulus money from the 2009 American Recovery and Reinvestment Act, the study published in Health Affairs indicated a widening gap between the financial performance of safety net hospitals and other hospitals after the recession, especially in total margins.

 

Implications for Reform

 

Study results suggest that the future may be dim for hospitals that continue to have negative margins. The study’s authors wrote that “the limited recovery of total margins for safety net hospitals and the continued negative margins for institutions that were financially weak before the recession may imply that these groups are not well positioned to meet future challenges.”

 

Leaders at these hospitals should carefully evaluate the care delivery provisions of the Affordable Care Act (ACA) that have or will be going into effect and take steps to weigh options to effectively address these provisions. Effective implementation of the ACA provisions could potentially help turn around negative financial performance. Alternately, poor preparation and implementation could exacerbate the difficult financial position of these hospitals.

 

(Source: “Study: No Permanent Recession Effect on Hospitals,” HFMA Weekly News, May 14, 2014)

 

 

iProtean subscribers, Part Two of the advanced Finance course, Strategic Responses to the Competitive Environment, will be published in your library by the end of June. If you enjoyed Part One, you should look forward to a continuation of the details offered by Michael Irwin and Dan Grauman. Topics include the competitive impact of consolidation/M & A activity, the next phase of mergers and acquisitions, the impact on bond ratings and taxable vs. tax-exempt bonds.

 

For a complete list of iProtean courses, click here.

 

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Hospitals Improve Patient Safety and Reduce Readmissions

Hospitals have decreased the frequency of patient harm and readmissions over the last two years, according to a new report from the Centers for Medicare & Medicaid Services (CMS). Experts credit the new quality initiatives in the Affordable Care Act (ACA), but some patient safety improvements preceded that law. (“Hospitals Boost Patient Safety, But More Work Is Needed,” Kaiser Health News, May 7, 2014)

 

Medicare readmissions decreased a full percentage point from 2012 to 2013—this translates to 150,000 fewer readmissions (an 8 percent reduction). CMS began charging hospitals for higher-than-expected readmissions over the last two years and more than 2,000 hospitals have been fined under this program. “A number of hospitals have devised new ways to monitor their patients after they leave, including scheduling regular check-ups and giving impoverished patients free medication.”  (“Hospitals Boost Patient Safety, But More Work Is Needed,” Kaiser Health News, May 7, 2014)

 

Improvements in patient safety decreased from 145 to 132 complications per 1,000 discharges over a two-year period (2010 to 2012)—a 9 percent reduction. Even with the improvements, one out of eight patients is injured during his/her time in the hospital.

 

CMS set up 27 hospital collaborations to share ways to improve patient safety, lower readmissions and to track progress, which may have contributed to the reduction in patient harm. In addition, the health reform law created a penalty for hospital errors that will go into effect in October.

 

An expert from the Association of American Medical Colleges noted that the health reform law’s financial incentives were likely a factor in reducing patient harm, but that much of the decrease is related to quality scorecards hospitals use internally as well as those from The Leapfrog Groups, Healthgrades and other similar groups.

 

 

iProtean subscribers, Part Two of the advanced Finance course, Strategic Responses to the Competitive Environment, will be published in your library by the end of June. If you enjoyed Part One, you should look forward to a continuation of the details offered by Michael Irwin and Dan Grauman. Topics include the competitive impact of consolidation/M & A activity, the next phase of mergers and acquisitions, the impact on bond ratings and taxable vs. tax-exempt bonds.

 

For a complete list of iProtean courses, click here.

 

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IPPS Proposed Rule Has Good and Bad News for Hospitals

The Centers for Medicare & Medicaid Services (CMS) has proposed a 1.3 percent increase in payments to hospitals under the inpatient prospective payment system (IPPS) for 2015. However, it projects a decrease in overall payments of about $241 million, primarily because of payment reductions for readmissions and hospital acquired conditions (HAC). Provisions related to readmissions and HAC are intended to improve the quality of hospital care.

 

Starting in FY 2015, CMS is required by law to raise the maximum readmissions penalty from 2 percent to 3 percent. CMS also is proposing to implement the ACA HAC reduction program. Beginning in FY 2015, the poorest performing hospitals will see a 1 percent reduction in their inpatient payments. (“CMS Projects Decline in Medicare Payments to Hospitals in FY 2015 IPPS Proposal,” Health Lawyers Weekly, May 2, 2014)

 

Other factors contributing to the decrease in payment include Medicare disproportionate care hospital changes, the expiration of certain statutory provisions that provided special temporary increases in payments to hospitals, and other proposed changes to IPPS payment policies,” according to a CMS fact sheet.

 

Hospital Transparency

The IPPS proposed rule also gives hospitals guidance on complying with an Affordable Care Act requirement that hospitals publish a list of their standard charges. Of course, charges differ from what hospitals are actually paid by private insurers (typically percentage discounts off charges). “Charge information is widely seen as less useful to consumers than data on the actual prices negotiated by insurance companies, especially because high-deductible health plans sharpen consumer interest in insurers’ negotiated rates.” (“CMS proposes long-delayed price transparency rule,” Modern Healthcare.com, May 1, 2014)

 

CMS officials justify the emphasis on charge data by noting the “wide variability” in hospital charges.

 

To see the CMS fact sheet, please click here.

 

 

iProtean subscribers, Part Two of the advanced Finance course, Strategic Responses to the Competitive Environment, will be published in your library by the end of June. If you enjoyed Part One, you should look forward to a continuation of the details offered by Michael Irwin and Dan Grauman. Topics include the competitive impact of consolidation/M & A activity, the next phase of mergers and acquisitions, the impact on bond ratings and taxable vs. tax-exempt bonds.

 

For a complete list of iProtean courses, click here.

 

For more information about iProtean, click here.