Children's hospitals trail in revenue growth, but generate stronger margins, Moody's says

Children’s Healthcare of Atlanta had over 1,000 days cash on hand at the time of Moody's report. (via Emory University)

Because children's hospitals hold an advantage over general hospitals when it comes to patient demand, limited competition and greater opportunities for fundraising, they drive stronger margins, according to a new report by Moody's Investors Service.

Examining 2015 data, Moody's predicts that these strengths will likely continue to provide resources for capital needs. The greatest risks to children's hospital margins is a high dependency on Medicaid funding, which is subject to certain cuts under the Affordable Care Act.

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Potential changes to federal Medicaid funding under the new presidential administration could also strain children's hospitals, depending on how individual states allocate Medicaid payments to them, Moody's said.

Despite these advantages, 2015 was the first year in which the growth rate for children's hospital revenue trailed that of adult hospitals. The median growth rate for children's hospitals was 6.2 percent over that time, below the 7.5 percent rate for adult hospitals, which was fueled by gains in insurance coverage from Medicaid expansion and public exchanges as well as mergers and acquisitions activity. Children's hospitals benefit less from expansion because most children are already insured either through Medicaid or the Children's Health Insurance Program.

Still, Moody's expects that the revenue growth rate for children's hospitals will revert back to outperforming that of adult hospitals. Benefits from Medicaid expansion will begin to slow, and growth at children's hospitals will be driven by a continued demand for pediatric services.

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The demand for profitable services, combined with healthy fundraising, are leading children's hospitals to generate strong operating cash-flow margins -- about 4 percent higher than adult hospitals, said Moody's. And stronger demand for high-acuity services is driving comparatively higher reimbursement rates; the median occupancy rates were 71 percent for children's hospitals versus 64 percent for adults. Plus, children's hospitals have an extra advantage with robust fundraising that leads to steady annual gifts, not typically a core strength of general hospitals.

Since those margins and fundraising capabilities are higher, children's hospitals also tend to have higher liquidity, Moody's found. Boston Children's Hospital in Massachusetts had 799 days' worth of cash on hand; Children's Healthcare of Atlanta had over 1,000. That's good news for those looking to invest in large-scale capital programs.

Children's hospitals also hold an edge when it comes to volume growth, which was at 5.6 percent in 2015 compared to 2.8 percent for adults. Moody's credits the strong performance partly due to adult hospitals closing their pediatric practices, helping children's hospitals to grow their market share.

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That's not to say they're not vulnerable. On average, they generate 52 percent of their gross revenue from Medicaid; that percentage is growing among adult hospitals, but it was still only 14 percent last year. A repeal of Medicaid expansion under a new presidential administration would impact children's hospitals modestly, because most children had insurance before the expansion, but a reduction in federal CHIP funding -- or a shift to Medicaid block grants -- could have a greater impact, depending on how states choose to distribute Medicaid funds to all hospitals.

Even with the ACA as is, federal funding for Medicaid expansion will decline beginning in 2017, leaving states to absorb more costs and possible make cuts in hospital funding to compensate.

Twitter: @JELagasse