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Smaller, nonprofit hospitals led a turnaround in margins, says Fitch

Following two years of falling margins, the trend has reversed course, with median margins improving more than 10% over 2018.

Jeff Lagasse, Associate Editor

U.S. nonprofit hospitals staged a positive turnaround in operating margins for the first time in two years, with much of it coming from smaller and less financially flexible health systems, according to Fitch Ratings in its latest annual medians special report.

Following two straight years of falling margins, the trend has reversed course, with median margins improving more than 10% compared to last year. Much of the year-to-year improvement is largely concentrated at the lower end of the rating spectrum -- specifically the "BBB" category.

WHAT'S THE IMPACT

The improvement is noteworthy for the simple fact that these smaller hospitals leading the rebound have a lower ability to trim expenses than do some of their peers. Because these lower-rated hospitals saw meaningful improvement, the thought at Fitch is that operational strength is returning to the healthcare sector.

The heights achieved in 2015, when margins were at their peak, may not be attainable, according to the report. But the news is positive all the same.

Conversely, operating margins more or less flattened out for "A" hospitals, though much of that can be attributed to Fitch upgrading some of those hospitals to "AA." Through cost cutting and revenue enhancement efforts, large providers still appear poised to control their own destinies.

Still, when it comes to pressure from the sector, nonprofit hospitals aren't yet in the clear. Efforts at curbing expenses have intensified, but to achieve longer-term stability they'll need to be relentless in their focus on clinical and operational improvements, the report found.

THE LARGER TREND

Though it focused on the industry rather than nonprofit hospitals specifically, Kaufman Hall's August 2019 Flash Report found that hospitals' financial performance rebounded in July as compared to June, driven by an increase in inpatient and emergency room volumes.

These improvements, however, don't necessarily translate to sufficient margins -- meaning many hospitals are still struggling. And individual hospital margins don't strictly correlate to the overall financial health of their parent health systems.
 

Twitter: @JELagasse

Email the writer: jeff.lagasse@himssmedia.com