Moody’s: Large and Small Hospitals Showed Revenue Growth in 2015

The 2015 medians showed that the largest 50 and smallest 50 hospitals and healthcare systems, measured by total revenues, experienced similar financial trends of improving revenue growth and stable-to-improving financial performance, according to a report on medians issued by Moody’s Investors Service in early September.

 

In the last two newsletters we highlighted key findings from Moody’s Investors Service reports on the 2015 medians. Part 1 focused on revenue growth to levels not seen since fiscal year (FY) 2008. Part 2 noted that continued M&A, strategic partnerships and other consolidation activity contributed to high revenue growth for hospitals in the Aa category.

 

In today’s post, we highlight Moody’s final 2015 medians report. Its analysts noted that financial performance, as measured by operating cash flow margin, was higher at the smallest 50 hospitals because of “nimble operations and the absence of higher cost subsidiary operations (e.g., health plans and large physician groups). But the size, scale and geographic diversification of the largest 50 systems will result in greater efficiencies over time.” (Medians – Revenue Grows for Largest and Smallest Hospitals, Capital Spending Diverges, Moody’s Investors Service Sector-In-Depth, September 8, 2016)

 

Key points noted by the analysts include:

 

Revenue growth was positive for both the largest 50 and the smallest 50 hospitals and health systems, but the compound annual growth did differ.

 

  • Compound annual growth rate for the largest 50 hospitals/health systems was 9 percent because of consolidation activities, increased efficiencies, diversification strategies, volume growth and negotiating leverage.
  • Compound annual growth rate for the smallest 50 hospitals was 3.8 percent.

 

Capital spending differed between the two groups.

 

  • For the smallest hospitals, capital spending remained below depreciation at 0.9 times.
  • The largest hospitals/systems continued to spend above depreciation at 1.3 times.
  • Balance sheet resources and access to the debt markets varied widely for both groups.
  • Moody’s analysts noted,” Irrespective of size, we expect much of future capital spending to focus on IT leading to a rise in average age of plant.”

 

Days cash on hand remained stronger among the smallest 50 hospitals.

 

  • Days cash on hand remained flat for both groups. But the smallest hospitals had a stronger 239 days cash on hand compared to 203 days for the largest hospitals/systems.

 

Operating performance continued to improve among the smallest 50 hospitals and health systems.

 

  • Operating margin and operating cash flow margin grew to 2.3 percent and 10.3 percent respectively. Small hospitals’ efforts to reduce cost and volume growth drove improved performance, as did increased Medicaid expansion and better forecasting of supplemental funding.
  • Operating performance among the largest systems remained stable.

 

(iProtean extends its appreciation to Moody’s Investors Service for giving us permission to quote liberally from its reports.)

 

 

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Moody’s: Consolidation Widens Financial Performance Among Rating Categories

When you consider the medians of the hospitals/systems at the two ends of the rating scale—Aa and speculative grade—there is greater dispersion of minimum, maximum, mean and standard deviation in the FY2015 not-for-profit healthcare medians. Moody’s Investors Service analysts noted in one of its recent reports on healthcare medians that “continued consolidation and the aim for size and synergies will continue to widen the varying financial performance among the rating categories. (Medians – Consolidation and the Quest for Size Lead to Wide Statistical Variances, Moody’s Investors Service Sector In-Depth, September 8, 2016)

 

The analysts noted the following key points:

 

Aa-rated and speculative grade health systems accounted for the highest variation in annual revenue growth.

  • Continued M&A, strategic partnerships and other consolidation activity contributed to the higher revenue growth in the Aa category, which saw a median 9.5 percent revenue growth rate.
  • For speculative grade credits, heightened competition and single-site operations saw median revenue growth rate of 6.5 percent.

 

Speculative grade health systems showed a higher standard deviation in debt service coverage than Aa, A and Baa categories.

 

  • With a standard deviation of 8.7x, speculative-grade credits exhibited a wider variation than Aa, A and Baa rating categories at 5.9x, 2.8x and 4.7x, respectively.
  • The wider variation is mainly due to the smaller size of the speculative grade credits and inherently riskier market positions.

 

Capital spending among multistate systems showed less variation than freestanding, single-state systems partly due to the number of projects, market access and unrestricted cash reserves.

 

  • Multistate systems showed a 0.2x standard deviation in annual capital spending, compared to 0.8x reported for single-state systems.
  • The single-state systems’ wider standard deviation is partly due to the infrequent nature of large-scale capital projects that increase spending for a year or two. A more limited geographic footprint also drives greater variability in capital spending. In contrast, many multistate systems have projects spread among different markets resulting in a more consistent spending level.

 

(iProtean extends its appreciation to Moody’s Investors Service for giving us permission to quote liberally from its reports.)

 

iProtean subscribers, the advanced Governance course, Governance in an Era of Population Health, featuring Jim Rice, Karma Bass and Marian Jennings, is now in your library. These experts discuss the implications of population health management for governing boards, governing across boundaries and how to prepare for population health initiatives.

 

 

 

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Moody’s: 2015 Medians Show Growing Revenue and Demand

This is the first of three newsletters based on Moody’s Investors Service medians reports for FY 2015. Next week we will cover consolidation/size and wide statistical variances, followed by revenue growth for the largest and smallest hospitals.

 

“Not-for-profit and public healthcare revenue growth rebounded to levels not seen since fiscal year (FY) 2008 and exceeded expense growth for the second consecutive year,” according to Moody’s Investors Service FY 2015 medians report. Steady revenue growth and strong financial margins support Moody’s stable outlook for the sector. (Medians – Growing Revenue and Demand Support Strong Margins, Contraction Ahead, Moody’s Investors Service Sector In-Depth, September 8, 2016)

 

Moody’s analysts noted that despite the pace of improvements in certain key trends, the pace “will not likely be sustained,” citing its expectations of moderating fundamental business conditions across the not-for-profit healthcare sector. One of the predominant issues continues to be the shift from traditional fee-for-service to value-based reimbursement, which places downward pressure on financial performance and financial metrics.

 

The key findings in the report on medians are noted below.

 

Multi-year trend of strong annual and three-year revenue compounded annual growth rates (CAGR) underscores the sector’s stability for fiscal year 2016.

 

  • Stronger annual revenue growth reflected benefits from consolidation in the sector, gains in insurance coverage and favorable utilization trends.
  • Growth will slow because year-over-year declines in bad debt have slowed, health insurance exchanges are showing signs of stress, expenses are rising with higher drug costs and weaker volume trends reported in the first half of FY 2016.

 

Building on prior years’ stable performance, the growth rates of absolute operating income and operating cash flow, as well as median profitability margins, surpassed historic levels. Median 3.4 percent operating margin and 10.3 percent operating cash flow margin were at a multi-year high for the sector.

 

  • Growth rates were not as robust as seen in the FY 2015 preliminary medians reflecting lower volumes in the latter part of FY 2015.
  • Careful alignment of revenue and expense growth, greater insurance coverage and good volume growth translated into a notable uptick in operating and operating cash-flow margins.
  • Margins should moderate given tightening reimbursement, increasing pension expense, exhausted cost-cutting measures and expectations of slowed revenue growth.

 

Improvement in absolute liquidity was modest and days cash on hand flat despite an upward trend in margins. Positive operating trends and moderated capital spending balanced by a weakened equity market returns contributed to tempered liquidity growth.

 

  • With a slower growth rate in absolute liquidity of 7.1 percent as compared to double-digit levels the last two years, days cash on hand showed no growth and remained relatively level at 211.8 days.
  • Liquidity measures tapered despite strong revenue and operating metrics and a modest level of capital spending, as evidenced by capital spending ratio of 1.1 times. This dynamic reflects the overall trend of weak second-half investment market performance in 2015.
  • Strengthening of absolute and relative balance sheet measures will narrow again in FY 2016 as growth slows in revenue, demand and profitability.

 

All utilization measures showed improved growth rates as uninsured population declined for second year. Demand trends reflected a more highly insured population and consolidation of the sector.

 

  • Combined inpatient admissions and observation stays grew 2.8 percent in the FY 2015 medians after a trend of low and variable growth over the last several years. The annual growth rate for inpatient admissions was a positive 2.7 percent for the first time since FY 2011.
  • Consolidation in the sector, benefits from gains in insurance coverage and continued aging of the population drove stronger growth rates.
  • Demand trends will level off with the lighter flu season seen in early FY 2016, insurance exchange products exhibiting stress and rising deductibles and co-pays that may thwart demand for electives.

 

Hospitals shied away from heavy investment in traditional bricks and mortar given challenges that face the sector while demand for information technology increased. Though capital spending remained above depreciation levels, it has moderated since FY 2012 and the average age of plant has risen.

 

  • After moderating from a high point in FY 2012, the capital spending ratio rose very modestly in FY 2015 but continues to exceed annual depreciation levels.
  • The average age of plant has risen in each of the last five years. However, hospitals report spending as much as one-third of their annual capital budgets on information technology, which is often recognized as an operating expense and therefore not captured in traditional capital spending measures.
  • Traditional capital investment will remain restrained, resulting in an increased median age of plant, as hospitals will be deliberate and cautious in funding infrastructure.

 

(iProtean extends its appreciation to Moody’s Investors Service for giving us permission to quote liberally from its reports.)

 

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