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Large for-profit hospital chains post tight profit margins in third quarter, Fitch says

The report suggests that higher labor and supply expenses, along with relatively weaker growth in pricing, all played a role.

Jeff Lagasse, Associate Editor

A group of the largest for-profit hospitals in the United States reported an average of 2 percent growth in organic patient volumes in the third quarter of 2015, but showed little ability to translate that growth into higher operating margins, according to a Fitch Ratings report.

That's an about-face from a string of previous quarters, when margins were up big year after year.

The group's average operating margin -- before interest, taxes, depreciation and amortization -- was up 16 percent compared to the same quarter in 2014, and some companies reported a steep drop in margins.

[Also: Fitch Ratings bullish on for-profit healthcare]

The report suggests that higher labor and supply expenses, along with relatively weaker growth in pricing, all played a role.

A number of roadblocks to profitability appear temporary, but Fitch expects margins for these companies to remain under pressure in the coming year.

A higher level of uncompensated care was a factor some hospitals cited as impediments to higher margins, but the Fitch report said that correlation is unclear.

"The benefits of the Affordable Care Act for acute care hospitals ramped up in early 2015, and the short operating history under the legislation makes it difficult to tell how much of the uptick in uncompensated care is related to a tapering of its benefits," according to Fitch. But concerns about the commercial viability of the public health insurance exchanges, along with stalled progress in the expansion of state Medicaid programs, hint that the benefit may be slow to accelerate in 2016.

Fitch expects Presidential election-cycle politics, as well as news flow generated by the ACA, to influence equity prices for hospitals and guide their capital deployment priorities -- which could affect whether credit ratings rise in 2016.

Twitter: @JELagasse

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