CHA News Article

Moody’s Report: 2013 Revenue Growth, Cash Flow Margins Mark All-Time Lows for Not-for-Profit Hospitals
Balance sheet measures and debt coverage ratios remain stable despite weak performance

Moody’s Investors Service has released a report titled Revenue Growth and Cash Flow Margins Hit All-Time Lows in 2013 US Not-for-Profit Hospital Medians, showing that for fiscal year 2013, U.S. not-for-profit hospitals saw continued slowing revenue growth and weaker operating performance, declining to levels not seen since the recession. In 2013, operating revenue growth dropped to a record low of 3.9 percent and was outpaced by expense growth for a second consecutive year, an unsustainable trend, as Moody’s notes. According to Moody’s, this unfavorable relationship resulted in a second year of declines in both operating margins and operating cash flow margins (when calculated with bad debt as a revenue deduction). The operating cash flow margin reached an all-time low of 9 percent.

Important findings discussed in the report include:

  • Revenue growth rate reached an all-time low, and expense growth outpaced revenue growth for a second consecutive year. Moody’s anticipates revenue growth will remain under pressure in 2014 as many of the 2013 trends continue to accelerate. As noted in the report, several factors continue to challenge revenue growth, including low rates from commercial payors; Medicare disproportionate share reductions, which began Oct. 1, 2013, and sequestration; an increase in high-deductible health plans, with higher levels of patient responsibility, that contribute to increases in bad debt and lower demand for health care services; and a shift to lower reimbursement outpatient visits and observation stays from inpatient admissions, a trend that increased with Medicare’s two-midnight rule starting Oct. 1, 2013. The report says that the impact of the individual mandate and Medicaid expansion may mitigate some of the slowdown in revenue growth, although likely not realized until 2015.
  • Profitability margins declined for a second consecutive year to levels not seen since the recession. The median operating margin and operating cash flow margin declined in 2013 for a second year in a row. The declines in both margins come after several years of growth or stability in profitability and reflect the second straight year of the annual expense growth rate outpacing the annual revenue growth rate, as well as a decline of the annual revenue growth rate. Another indication that operating performance weakened further in 2013 is the increased volume of providers that reported operating losses. One-fourth (25.1 percent) of the hospitals and health systems in Moody’s sample reported operating losses in 2013, up from 2012 (17.2 percent) and 2011 (13.8 percent).
  • Inpatient admissions declined as outpatient services grew, although the growth rate slowed compared to prior years, indicating a decline in health care demand. In 2013, the median inpatient admissions growth rate was a negative 1.3 percent, following flat growth since 2009. The accelerated rate of decline in 2013 reflects an industry-wide effort to reduce hospitalizations and move care to a more efficient lower-cost outpatient setting. Outpatient volumes continued to show growth. However, the rate of growth slowed for the first time in 2013. This trend indicates a lower demand for services, after accelerating over the last several years, with the clinical shift to outpatient from inpatient care. The lower growth in emergency room visits is the result of many hospitals’ focus on population health management and primary care services to prevent and manage chronic diseases and to reduce unnecessary emergency room visits.
  • Exposure to Medicare increased, shifting away from commercial payors, another factor in the slower revenue growth. The median gross revenues derived from Medicare continued a multi-year trend of increases in 2013, reaching a peak of 44.4 percent. The median for Medicaid, self-pay and other payors remained steady over the last three years after increasing during the recession. Commercial insurers’ portion of gross revenues continued to decline to an all-time low of 32.4 percent. Moody’s expects government payors’ share of hospital gross revenues to continue to increase with the aging population and Medicaid expansion.
  • Unrestricted absolute and relative liquidity measures grew as equity market returns were strong and hospitals spent less on capital than in prior years. The median absolute unrestricted cash and investments increased in 2013 compared to 2012. The median growth rate of absolute unrestricted liquidity was 11 percent in 2013, after several years of high-digit growth. Capital spending decreased in 2013 after two years of growth. Investments were less about constructing new inpatient facilities and more about building infrastructure to prepare for population health and new payment methodologies.

For more information, review the complete Moody’s report, attached.