CHA News Article

Preliminary Medians for Nonprofit Hospitals Show Expenses Growing Faster Than Revenues
Findings point to continuing operating pressures on nonprofit hospitals

Moody’s Investors Service recently released the fiscal year (FY) 2013 nonprofit hospital preliminary financial medians, showing that both the operating margins and operating cash flow margins dropped as revenue growth continued to slow. In addition, expense growth continued to surpass revenue growth, pointing to continuing operating pressures on nonprofit hospitals. According to the report, debt coverage metrics remained stable, and balance sheet measures grew despite weaker operating performance.

Major findings from FY 2013 preliminary medians include:

  • Median operating margins and operating cash flow margins declined for a second consecutive year. The report attributes the decline in performance to a number of factors, including: 1) low rate increases from commercial payors and rate cuts from Medicare and Medicaid; 2) a payor mix shift to governmental payors from commercial payors; 3) an increase in high-deductible health plans, with higher levels of patient responsibility contributing to increases in bad debt and lower health care demand; and 4) a shift to lower reimbursed outpatient visits and observation stays from inpatient admissions.
  • Median expense growth rate dropped but remained greater than the median revenue growth rate for a second consecutive year. According to the report, the slowdown in expense growth comes in the midst of increasing costs for physician alignment and information technology, but also demonstrates strategies and focus on cost control. For some hospitals, however, revenue growth was supported by non-recurring funding sources, including information technology, meaningful use payments and payments under state provider fee programs.
  • Balance sheet ratios remained stable despite lower cash flow. The median unrestricted cash and investments increased in FY 2013 compared to FY 2012. The report finds this growth is consistent across all rating categories and comes as equity market returns were strong and capital spending levels declined.

The final FY 2013 medians will be published in summer 2014. Moody’s expects the final medians to show weaker operating performance than the preliminary medians due to the inclusion of more hospitals with calendar year-end audits after Sept. 30, 2013, as well as hospitals concentrated in geographic regions with weaker economies.  Moody’s anticipates the maintenance of general healthy balance sheet ratios similar to the preliminary medians. The full medians report will reflect a larger sample size of Moody’s rated portfolio of hospitals and health systems.