Moody’s Investors Service recently released its preliminary medians for 2017. The results show a continuing decline in not-for-profit and public hospitals’ profitability metrics. Margins hit 10-year lows—falling below levels seen during the last recession.
Profitability margins mark 10-year low. The median operating cash flow margin dipped to 8.1% as expense growth outpaced revenue growth for the second consecutive year. This indicator of profitability fell below levels seen during the 2008-09 recession, and Moody’s expects this suppressed level will continue over the next year. Details include:
- Median operating cash flow margin growth was -11.4 percent, the greatest rate of decline in five years.
- This weakening reflects the increasing gap between revenue growth and expense growth. Expense growth was attributed to labor shortages, technology investments and supply costs. Median annual expense growth exceeded annual revenue growth by 1.2 percent.
- Revenue growth has been constrained by declining reimbursement rates, a shift to less profitable outpatient care and growth of governmental payers.
Moody’s analysts wrote “We expect expense growth will continue to outpace revenue growth over the next year, suppressing margins. New strategies to stimulate revenue growth will be integral as hospitals and health systems exhaust cost reduction efforts.” (Preliminary medians underscore negative sector outlook, Moody’s Investors Service Sector In-Depth, April 23, 2018)
Additional contributors to declining profitability included decreasing debt affordability, declining reimbursement and a shifting payer mix.
- Despite a median 1.7 percent decline in total absolute debt, most leverage metrics softened. Operating challenges and increased debt issuance in the fourth quarter of calendar year 2017 will keep debt service coverage measures subdued.
- Volume growth slowed and median growth in outpatient visits (2.2 percent) continued to outpace median growth in inpatient admissions (1.2 percent).
- Revenue pressures increased as reimbursement from commercial payers decreased.
- The aging population, growing bad debt and a lower rate of reimbursement increases will continue to add credit stress.
(iProtean, now part of Veralon thanks Moody’s Investors Service for its permission to excerpt portions of its Special Outlook.)
Coming next week: The Volume to Value Paradox featuring Nate Kaufman, Marian Jennings and Dan Grauman. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.
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