Moody’s Investors Service reported a continuation of “favorable operating performance” for not-for-profit and public hospitals, citing its preliminary FY 2015 medians.
“Strong revenue growth and strengthening profitability margins are due to gains in insurance coverage, volume increases, improved revenue cycle, expense management and the stabilizing of changes implemented by the Affordable Care Act (ACA),” Moody’s analysts wrote in its Sector In-Depth Report. (Preliminary FY 2015 Medias Show Strong Revenue Growth, Profitability; Liquidity Holding Steady, Moody’s Investors Service, Sector In-Depth Report, April 25, 2016
The key findings in the report appear below:
Median annual revenue growth rate continued to outpace the median expense growth rate
- Median annual revenue growth rate was a robust 7.4 percent in preliminary FY 2015 medians and outpaced the median expense growth rate for the second consecutive year.
- The not-for-profit hospital sector continued to stabilize; for example, the three-year revenue compound annual growth rate (CAGR) (5.6 percent) exceeded the three-year expense CAGR (5.5 percent) for the first time in four years.
- Continued consolidation drove stronger medial annual revenue growth, benefits from gains in insurance coverage and favorable utilization trends.
- Revenue growth will likely moderate in the full-year medians following weaker volume trends in the second half of 2015.
Surge in absolute operating income and operating cash flow materially strengthened margins
- Following several years of little to no growth, median absolute operating income and operating cash flow grew significantly at 25 percent and 15 percent, respectively, in FY 2015 preliminary medians over FY 2014, driven to a large extent by greater insurance coverage, good volume growth and solid expense controls.
- Significant improvement in operating performance translated into strong 3.4 percent median operating margin and 10.3 percent median operating cash flow margin, a multi-year high for the not-for-profit hospital sector.
- Margins are expected to soften in full-year medians following lower volumes in the latter part of 2015.
- Longer term margins should quell given tightening reimbursement, increased pension expense and exhausted cost cutting measures.
Gains in unrestricted cash and investments improved liquidity and debt ratios
- Median growth rate of unrestricted cash and investments decelerated to 7 percent compared to 11 percent in FY 2014, allowing for only a slight improvement in median cash on hand to 219 days from 217 days.
- Median absolute total debt decreased in FY 2015 to $292 million from $297 million in FY 2014. Coupled with the growth in absolute cash, this helped lift the median unrestricted cash and investments-to-total debt to 161 percent from 157 percent in FY 2014.
- Modest capital spending (median capital spending ratio of 1.1 times) and healthy equity market returns through mid- year 2015 support the continued rise in liquidity and decline in leverage.
- Fiscal 2015 liquidity medians will taper given weaker investment market returns in the second half of the year.
Continued growth across all utilization measures
- Total admissions, including observation stays and inpatient admissions, grew 3.4 percent in preliminary FY 2015 medians, after several years of relatively flat growth.
- Increasing volumes were due to the settling legislative environment following several years under the ACA, which has promoted a considerable reduction in the uninsured population through Medicaid expansion and the exchanges. Gallup reports the uninsured rate at 11.9 percent in 2015, a notable reduction from 17.3 percent in 2013.
- Demand trends should level off in the full year medians with many systems reporting weaker admissions in the second half of 2015 due to a lighter flu season.
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