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Hospitals hit a revenue crunch

Not-for-profit hospitals are facing huge revenue challenges amid payment reform and shifting payer mixes, leaving relationships with commercial insurers in a flux.

Among not-for-profit hospitals in fiscal year 2013, median expenses grew faster than median revenue, for the second year in a row, while both median operating margins and operating cash flow margins dropped, Moody's analyst Jennifer Ewing and colleagues found in an audit of 203 hospitals' financial statements.

Annual expenses grew at a rate of 4.6 percent last year, half a percent more than revenue, which increased at a median rate of 4.1 percent, while median operating margins hit a three year low of 2.2 percent, and median operating cash flow margins fell to 9.3 percent, from 9.5 percent the previous two years.

Ewing and colleagues attribute the slow revenue growth and operating margin challenges to low rate increases from commercial payers and rate reductions from Medicare and Medicaid, in tandem with a payer mix that is generally shifting to more government payer reimbursement.

The analysis, covering 45 percent of Moody's rated portfolio of not-for-profit hospitals, is based on the fiscal year ending September 30, 2013, and doesn't account for impacts that might come with the Affordable Care Act's coverage expansions, such as reimbursement for patients covered by new exchange plans or Medicaid, Ewing noted.

With exchange plans having somewhat lower rates than the typical commercial plan, new Medicaid beneficiaries bringing notoriously low reimbursement, and Medicare reimbursement pressure continuing, hospitals may be looking to commercially-insured patients for more business, especially in health systems with newly-acquired physician practices.

Among patient revenue sources at the 203 hospitals examined last year, a median of 44.3 percent came from Medicare (up from 44.1 percent in 2012), 12.9 percent came from Medicaid, (two-tenths of a percent less than the year before), 32.1 percent came from commercial payers (down from 33.4 percent) and 7.6 percent came from self-pay, the same as in 2012..

There is also the increasing prevalence of high-deductible health plans that can at once slow demand and lead to bad debt, Ewing noted, along with outpatient visits and observation stays reimbursed at lower rates.

Despite the weak operating medians and revenue growth last year for hospitals, though, debt coverage metrics were stable and balance sheet measures grew, thanks to strong equity markets.

And the median expense growth rate is slowing, Ewing noted, from a four-year high of 5.5 percent in 2012 to 4.6 percent last year. Cash-on-hand days are also improving, from a median of 185 in 2012 to 204 last year.

"The slowdown in expense growth comes in the midst of increasing costs for physician alignment and information technology, but demonstrates strategies and focus on cost control," Ewing and colleagues wrote.

As they go through the rest of the not-for profit hospitals in Moody's rating portfolio, they expect final medians to "show weaker operating performance," in part from hospitals in part of the country with struggling regional economies. But they also anticipate "general healthy balance sheet ratios."

While some hospitals are looking for opportunities to grow revenue from commercially-insured patients, some may also be looking for payers to partner with on care coordination and cost savings ventures.

Even short of accountable care contracts, there are opportunities for partnerships on issues like price transparency.

"There is more competition for total value than in the past," as John Wray, senior vice president of network contracting and delivery system collaboration at Cigna, said recently. "Hospitals and health plans have certain capabilities that can be employed more effectively together."

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