iProtean—More Ratings Downgrades Due to Decline in Admissions

New special publications from Moody’s Investors Service highlight the continuing deterioration of patient volume in not-for-profit hospitals and the impact of that decline on overall performance. As hospitals transition from a fee-for-service to a value-based model they will experience significant disruption that will continue to impact performance in 2013 and in the coming years. Admissions are expected to continue to fall. (Moody’s Investors Service, August 22, 2013)


Quarterly Ratings

In its Special Comment on quarterly ratings, Moody’s noted that ratings downgrades outpaced upgrades by a two to one margin for the second consecutive quarter in 2013. The common driver behind a majority of the downgrades was “material admissions declines” ranging from 1 percent to nearly 10 percent from 2011 to 2012.


Though the industry is in transition, most payer arrangements are still based on fee-for-service methodologies that underscore the need for volumes to cover costs and produce positive cash flow, the authors said. Significant declines in volumes lead to weaker performance and debt coverage measures, and this factored into many of the downgrades in the second quarter of 2013. They noted that most of the downgraded hospitals were small (less than $500 million in operating revenue) and may have been unable to respond quickly to the volume declines. (Moody’s Investors Service, August 15, 2013)


2012 Median Report

The Moody’s FY 2012 Median Report released on August 22 highlighted the triple challenges of operating with lower volumes and lower revenue growth, higher exposure to government payers and increased expenses. Some of its key findings include:

  • Weaker operating performance after three years of stability
  • Decline in median operating cash flow margin
  • Operating performance either flat or down across all rating categories
  • Stable balance sheets
  • Expense growth that exceeded revenue growth
  • Favorable liquidity and leverage ratios


Expense Growth, Revenue Decline

For the first time since FY 2008, the expense growth rate exceeded the revenue growth rate. Both median total operating revenue and net patient revenue growth rates declined, but median expense growth rate increased. “The reappearance of expense growth exceeding revenue growth is unsustainable,” the authors noted.


Moody’s analysts said they expect revenue growth will remain pressured in FY 2014 because of a variety of factors:

  • Medicare payment rates increasing by only 0.7%
  • Sequestration
  • DSH reductions
  • Historically low rate increases from commercial payers
  • Uncertain reimbursement rates and enrollment levels from health exchanges
  • For hospitals in states that are not expanding Medicaid, no enhanced federal funding


On the expense side, it will be difficult to make additional expense reductions, at least in the short term. Hospital management teams have been cost cutting since the beginning of the recession. They have reduced staff and benefits, improved productivity levels, cut supply costs, and downsized or closed unprofitable services and programs. The next level of cost reductions undoubtedly involve more challenging process and cultural changes while the benefits may not be immediately realized, the authors noted. (Moody’s Investors Service, August 22, 2013)


Median Data Trends Summary

Moody’s summarized both the positive and negative 2012 median data trends.


Positive Median Data Trends

  • Balance sheets remained healthy in FY 2012. Favorable investment returns and low capital spending led to growth in absolute unrestricted cash and investments and improved median cash- to-direct debt. Median days cash on hand remained stable.
  • Debt coverage measures remained favorable and on par with the prior year.
  • Median growth rates of outpatient volumes continued to trend upwards.
  • Revenue growth in FY 2012 was aided by external funding sources including information technology meaningful use payments and state provider fee programs.
  • The median rate of growth in direct debt continued a negative multi-year trend reflecting normal principal amortization despite growth in the aggregate level of direct debt for the portfolio.


Negative Median Data Trends

  • Median operating margin and median operating cash flow margin declined. Absolute median operating income was down and absolute median operating cash flow generation was flat compared to FY 2011. Operating margins were either flat or showed some decline across all rating categories.
  • Expenses grew faster than revenues, which contributed to weaker operating performance. Median annual revenue growth rate slowed to 5.2% in FY 2012 from 5.4% in FY 2011, while the median annual expense growth rate increased to 5.5% in FY 2012 from 5.0% in FY 2011. Median growth rate of net patient revenues slowed noticeably to 4.7% from 5.3%.
  • Median growth rate of inpatient admissions was a decline of -0.6% in FY 2012 after flat growth of 0.0% in FY 2011. Meanwhile the median observation stay growth rate increased to 9.0% in FY 2012 compared to 8.8% in FY 2011. The shift from inpatient admissions to observation stays has been a major contributing factor to the lower revenue growth trends in recent years.
  • Payer mix continues to shift toward government payers and away from commercial payers.
  • The median rate of growth of comprehensive debt for the portfolio increased due to higher unfunded pension liabilities from a lower discount rate.



Information for this publication is from two Moody’s reports, both with lengthy titles.

  1. Median Report, US Not-for-Profit Hospital 2012 Medians Show Balance Sheet Stability Despite Weaker Performance: Revenue Growth Falls Below Expense Growth for the First Time Since FY 2008; Liquidity and Leverage Ratios Remain Favorable, Moody’s Investors Service, August 22, 2013; and
  2. Median Report, US Not-for-Profit Hospital 2012 Medians Show Balance Sheet Stability Despite Weaker Performance: Revenue Growth Falls Below Expense Growth for the First Time Since FY 2008; Liquidity and Leverage Ratios Remain Favorable, Moody’s Investors Service, August 22, 2013.



iProtean subscribers, have you viewed the new advanced Governance course in your library? Physicians and Governance features Barry Bader, Lisa Goldstein and Monte Dube who discuss the current debate surrounding physicians on the board of directors. They provide suggestions and considerations about the various challenges associated with physician board membership.


For a complete list of iProtean courses, click here.



iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Brian Wong, M.D. (The Bedside Project), Doug Mancino, Esq. (Hutton & Williams, LLC)  For more information, click here.


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