The impact of transition rocks nonprofit hospitals' financials

Nonprofit hospitals posted their second straight year of revenue declines in 2013 and their dismal rate of revenue growth broke records, according to a Moody’s Investors Service report released this week.

Moody’s said that median revenue growth was 3.9 percent, down from 5.1 percent in 2012 and a shocker compared to historical growth rates that have exceeded 7 percent. Moody’s also noted that hospital expenses outstripped revenue growth – a situation the agency described as “unsustainable.”

While Moody’s said it expects more of the same for 2014, it did note that hospital liquidity improved in 2013 as hospitals reduced capital spending and returns on equity investments were strong.

Some findings from the report:

• Factors continuing to put pressure on revenue growth include low rate increases from commercial payers; continued cuts in reimbursement from the federal government; increases in high-deductible health plans contributing to bad debt and lower demand for services; and more observation stays from inpatient admissions and a shift to lower reimbursed outpatient services.
• The expense growth rate slowed in 2013 but still exceeded revenue growth. Contributing to the slower rate of expense growth has been cost containment efforts by hospitals and the shift to lower cost and more efficient outpatient settings. Going forward, Moody’s report said the agency expects cost containment efforts will focus on changing processes and care delivery, both methods whose benefits will take time to realize.
• Operating cash flow margin tanked to an all-time low of 9 percent, a position, said Moody’s, lower than at the height of the recession in 2009. A quarter of the 383 nonprofit hospitals and health systems sampled by Moody’s reported operating losses in 2013, and half of providers reported a decline in absolute operating income. The poor margins, the report said, reflect annual expenses exceeding revenue growth.
• Commercial insurers’ portion of gross revenues dropped to an all-time low of 32.4 percent. Moody’s said that this decline, along with lower reimbursement rates and tighter control of commercial payers, has made it difficult for hospitals to offset the losses experienced from government reimbursement and contributed the low revenue growth. Because of the aging population and Medicaid expansion, Moody’s expects more of hospitals’ gross revenues will come from the federal government.