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Large nonprofits seeing better margins as smaller hospitals struggle, Fitch report says

Mergers, integration benefits the big guys, report says.

Overall, the median for cash on hand grew to 203 days, compared to 193.9 days in 2013, driven by strong investment returns, capital expense management and an aggressive focus on cash collection, the report said.Overall, the median for cash on hand grew to 203 days, compared to 193.9 days in 2013, driven by strong investment returns, capital expense management and an aggressive focus on cash collection, the report said.

Nonprofit healthcare providers are starting to see better margins, according to a new report by Fitch Ratings, but the gap is widening between major health systems and smaller nonprofits that are struggling to stay out of the red.

According to Fitch, many nonprofits are seeing operational profits rise, especially in states that have expanded Medicaid since it has resulted in more low-income residents having access to coverage. The growth, however, is mostly seen in systems with high credit rates, specifically those with A or AA ratings.

"Overall, larger, higher-rated organizations have benefited from a more diversified revenue base to spread operating volatility, better capacity to plan and execute sophisticated financial performance management initiatives, stronger negotiating power with payers and suppliers and other broader economies of scale," the report said.

For example, in 2014, AA rated systems had a median days cash on hand of around 289 days with operating margins around 5 percent. On the other hand, BBB rated systems are seeing 162 days cash on hand and operating margins closer to 0.6 percent.

[Also: Why days cash on hand is so important for hospitals]

For the larger, higher-rated system, a lot of the growth is coming through mergers and acquisitions, the report said, which is resulting in more solid market positions and an expanded regional reach for these systems, adding stability.

Small hospitals, especially community hospitals, are struggling since the market is favoring larger systems or integrated networks.

Clinical volumes also rebounded in 2014, the report said, driven by Medicaid expansion and state and federal insurance exchanges helping more people to find insurance options.

Overall, the median for cash on hand grew to 203 day, compared to 193.9 days in 2013, driven by strong investment returns, capital expense management and an aggressive focus on cash collection, the report said.

The median cash-to-debt ratio also grew to 141.8 percent in 2014 from 127.7 percent a year earlier. That gain, however, was not seen when looking at systems rated BBB. For those business, cash-to-debt fell to 89.5 percent compared to 93.6 percent in 2013.

[Also: Scrutiny turns to nonprofit hospital giants]

Investments in revenue cycle are also driving improvement for the sector, Fitch said. Days in accounts receivable fell to 48.2 days in 2014 from 49.3 the prior year despite the rise in high-deductible health plans and continued investments in healthcare technology.

The credit ratings agency said it would watch the rollout of ICD-10 in October closely, looking for major disruptions in cash flow from stalled or denied claims. For now, Fitch said the outlook is good since it believes most organizations have done extensive training and have contingency plans in place to manage any disruption.

What's not so good is the company's outlook for smaller facilities.

"There is increasing need for both the capability and the scale to support population health management and to begin absorbing risk and other health plan arrangements; as a result, Fitch anticipates continued divergence in the financial performance of larger, more integrated providers and smaller, standalone providers."

Twitter: @HenryPowderly

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