Not-for-profit hospitals appear to be successfully managing themselves out of the significant downturn that resulted from the Great Recession, according to the recently released Moody’s Investors Service report on 2014 preliminary medians.
“Not-for-profit hospital operating margins and operating cash flow margins stabilized as revenue growth rate edged ahead of the expense growth rate, the first time since the fiscal year 2011 medians,” the Moody’s authors wrote. (“Growth in Hospital Revenue Edges Ahead of Expenses in 2014,” Moody’s Investors Service Sector-in-Depth Report, May 26, 2015)
Highlights of the report include:
- Annual median revenue growth improved in 2014 to 4.7 percent, the first time in three years. The pace of operating expense growth continued to decline. This revenue growth is a “sharp reversal” of the decline in growth rate since fiscal year 2011 medians. Moody’s attributed revenue growth in part to consolidation in the not-for-profit hospital sector and the initial influence of the Affordable Care Act as benefits of the exchanges and Medicaid expansion were realized.
The repeal of the sustainable growth rate (SGR) formula for physicians’ services may aid future revenue growth for those hospitals with sizable physician employment strategies.
The median annual expense growth rate declined to 4.6 percent in FY 2014, down from 5.0 percent in FY 2013 and 5.5% in FY 2012. Moody’s attributed the decline to the ongoing shift of patient care to lower-cost and more efficient settings such as outpatient and ambulatory centers. Operating efficiencies also benefited from size and scale.
- Unrestricted cash and investments grew for the second consecutive year due to strong equity market returns and “cautious” capital spending.
- Profitability margins stabilized. Moody’s noted, however, that the 2.2 percent operating margin and the 9.2 percent operating cash flow margin are down from higher levels in 2012. Operating margins improved from 2.0 percent in FY 2013 to 2.2 percent in 2014, and operating cash flow margins remained relatively stable (9.3 percent in 2013 and 9.2 percent in 2014). Moody’s noted that the growth rate of both measures remain negative, but have improved following a two-year decline in the rate of growth.
A number of factors have contributed to stable performance in 2014:
- Resiliency with careful budgeting, increased efficiencies including an ability to adjust to lower reimbursed settings, that translated into lower expense rate of growth
- Payer mix shift away from self pay
- Utilization trends that were generally favorable including increased growth rates of outpatient visits, outpatient surgeries and combined inpatient admissions and observations stays.
Final medians will likely show weaker operating performance than the preliminary medians because the finals will include more hospitals with December year-end audits that are concentrated in geographic regions with weaker economies, the authors wrote. The full medians report will be published this summer.
(Note: iProtean thanks Moody’s Investors Service for permission to quote liberally from its report, Growth in Hospital Revenue Edges Ahead of Expenses in 2014. iProtean subscribers can read the full 2014 preliminary medians report in several of the Finance courses’ Resources sections.)
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