Operating margins stunted for nonprofit hospitals, says Fitch

WHAT HAPPENED

Stunted operating margins remain a thorn in the side for U.S. nonprofit hospitals, though balance sheets are healthier, according to new Fitch Ratings report.

IMPACT

Ongoing struggles with operating margins reflect a broader sector trend in which healthcare reform pressures have only been alleviated, not eliminated. Labor and wage pressures for experienced staff are expected to continue, with the labor market improving and a persisting need for more clinicians.

The transition to population health and at-risk contracting are also anticipated to contribute to operating margin difficulties.

Fitch's 2018 medians show that operating margins have declined across the board for the entire rating spectrum of hospitals. Key balance sheet metrics like days' cash on hand, cash to debt and leverage, however, have improved over the last year and are now at all-time highs. Whether this means better days ahead for the sector remains to be seen.

Though Fitch's revised rating criteria places more emphasis on balance sheet strength, operating profitability is still very much a pivotal factor in determining a hospital's fiscal health. Despite weakening operating margins, the median rating for Fitch's rated credits remains at 'A.'

That said, even strong balance sheets will start feeling the heat if operational pressures continue for some time.

THE TREND

Moody's Investors Service came to a similar conclusion at the end of August, finding that for the second straight year expenses have surpassed revenues for nonprofit and public hospitals, creating instability and further pressuring hospital margins.

Fueling the trend are lower reimbursement rates, a shift to outpatient care, growing merger and acquisition activity, and rising ambulatory competition. The drop in expense rate was due largely to better control of labor and supply costs.