For the second straight year, expenses at nonprofit hospitals and health systems are growing faster than revenues, a trend that is negatively impacting margins and cash flows, according to a report from Moody's Investors Service.
Moody's analysts released the preliminary medians for fiscal year 2013, basing its analysis on 45 percent of its rated portfolio. Moody's rates 448 total healthcare organizations.
In 2013, the median operating margin (2.2 percent) and operating cash flow margin (9.3 percent) were both down from the published 2012 medians. Those declines reflect the second consecutive year in which hospitals' expense growth rate outpaced the revenue growth rate. In 2013, expenses grew 4.6 percent, while revenue only increased 4.1 percent. Those figures are both down from 2012, when the expense growth rate was 5.5 percent and the revenue growth rate was 5.2 percent. In 2002, the median annual expense and revenue growth rates were both around 9 percent.
Moody's attributed the decline in profitability to several factors, including low rate increases from commercial payers, Medicare and Medicaid cuts, the shifting payer mix, more high-deductible health plans and higher rates of outpatient visits and observations stays, which pay less than inpatient admissions.
However, it's not all bad news for the nonprofit hospital sector. Despite the reduced margins, hospitals were still able to maintain stable balance sheets, as unrestricted cash and investments increased in FY 2013 compared with FY 2012. Median days cash on hand soared from 185.3 to 204.3.
"This growth is consistent across all rating categories and comes as equity market returns were strong and capital spending levels declined," Jennifer Ewing, a Moody's analyst, wrote in the report.
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