OLDWICK, NJ – A new report by A.M. Best claims that many small and mid-sized not-for-profit hospitals are paying insufficient attention to their bottom lines, making it difficult for them to effectively carry out their mission and endangering their long-term survival.

Analysts at the credit rating agency say monitoring financial performance should be a crucial focus of management at smaller not-for-profit hospitals because "without margin, there can be no mission."

The authors said it's particularly important for smaller hospitals to focus on strategic planning and define a clear and concise mission that includes adequate profitability.

A.M. Best has observed in recent years that many hospitals under financial stress have been forced to discontinue service lines while others have reduced community care to the indigent by eliminating programs. Others have been forced to close, merge or consider joint ventures with larger facilities and health systems.

In general, the report notes, smaller hospitals have historically been less profitable, with many struggling to meet the 1 percent to 3 percent average operating margin that is the norm for most of the not-for-profit hospital industry.

A.M. Best attributes this profitability problem to a lack of economies of scale, poor payer mix, higher overhead costs, less high-margin specialty service lines and an overall lower revenue base. The agency also notes that smaller facilities have lower Medicaid volumes and a correspondingly lower amount in disproportionate share hospital (DSH) payments.

Mid-sized non-critical access hospitals (approximately 25-100 beds) are struggling the most, the report said. These hospitals have difficulty recruiting and retaining physicians and have limited access to capital.

A.M. Best analysts recommend that not-for-profit hospital leaders take a “strategic, in-depth look at how they do business.” This includes analyzing environmental, industry and operational strengths, weaknesses, opportunities and threats as well as their hospitals’ resources.

Secondly, the agency suggests that the results of these assessments need to be urgently conveyed to all key stakeholders, including local regulators and communities.

Hospital leaders must also carefully consider their service line portfolio mix and the financial impact of their strategic decisions, the report notes. “Many smaller hospitals also are contemplating market-entry strategies and reassessing whether they want to go it alone,” the authors write. “Many have entered, or are discussing ways to develop, affiliations with stronger, better branded hospitals and/or health core markets.”

The A.M. Best report concludes by noting that small to mid-sized, stand-alone not-for-profit hospitals will remain challenged in the near term. This is due to the volatility in the capital and investment markets, a growing need for capital expenditures, as well as the general negative economic conditions.