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Nonprofit, public hospital margins hit 10-year record low, Moody's report says

The firm pointed to strain of expenses and stalled revenue growth as the core reasons.

Beth Jones Sanborn, Managing Editor

A new Moody's report shows nonprofit and public hospitals margin's have hit a 10-year low, falling below levels seen during the last recession.

"Despite positive volume trends, we expect expense pressures, declining reimbursement and a shifting payor mix will contribute to challenged financial performance over the next year," the report said.

[Also: Moody's revises nonprofit and public health outlook to negative as hospitals face rising operating pressure]

Profitability margins hit the lowest point in a decade, with median operating cash flow margins dipping to 8.1 percent from 9.5 in 2016, and lower-rated hospitals felt a significant strain on margins. These facilities are usually smaller with fragile financial operations making them more vulnerable to industry pressures. They also have less negotiating power with insurers and a tougher time attracting physicians.This vulnerability will likely fuel additional merger and acquisition activity as these facilities struggle to survive. 

"We expect small rural and community hospitals to seek capital partners as competition increases, and revenue and expense challenges intensify," Moody's said.

[Also: Moody's warns hospitals to beware of payer growth strategies on margins, bargaining power]

Meanwhile, revenue growth was hindered by declining reimbursement rates, the shift toward outpatient care and rise of government payors. The annual median revenue growth rate dropped by 2.2 percent from 2016, a bigger dive than the one taken by the median expense growth rate of 1.7 percent.

While absolute unrestricted cash and investments grew by a median 8.2 percent, that gain was tempered by a meager 1.5 percent gain in median days cash on hand. Labor, technology and supply costs hampered growth there.

Finally, shifting payor mix and demand challenged hospital margins as well. Median outpatient visits  grew by 2.2 percent while inpatient admissions only rose by 1.2 percent as patients opt for less costly outpatient care. Medicare's share of revenue increased from .6 percent to 1.6 percent from 2016 to 2017 and commercial payor growth was negative 1.9 percent. Moody's said this trend would continue as the population ages. 

Recent policy changes, namely the repeal of the individual mandate under the Affordable Care Act will also play a role in industry shifts. 

"Declines in the median growth rate of self-pay stabilized as the full benefit of expansion and exchanges under the Affordable Care Act have been essentially realized," Moody's said. "We expect selfpay to show growth and revenue to remain pressured by rising bad debt as the number of uninsured increases with repeal of the individual mandate and employers continue to move to high deductible health plans."

The preliminary medians are based on audited fiscal 2017 financial statements for 160 eligible free-standing hospitals, single-state health systems and multistate healthcare systems. The medians primarily reflect audit year ends of September 30, 2017 and before.

Twitter: @BethJSanborn
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