Factors contributing to a grim economic report from Moody's Investors Service include low rate increases from commercial payers, Medicare and Medicaid rate cuts, and a shift in payer mix to more governmental payers, says a Moody's analyst.
Expense growth for the not-for-profit hospital sector outpaced revenue growth in fiscal year 2013, says a Moody's Investors Service report released Wednesday.
In its report, "Revenue Growth and Profitability Drop in US Not-for-Profit Hospital Preliminary Medians," Moody's says FY 2013 marks the second year in a row that the annual expense growth rate (4.6%) was higher than the annual revenue growth rate (4.1%).
"The median annual expense growth rate declined in FY 2013 compared to FY 2012, demonstrating a focus on cost containment among hospital operators and the shifting of care to a lower-cost and more efficient setting… The FY 2013 not-for-profit hospital preliminary medians point to continuing operating pressures in the industry. Both the operating margins and operating cash flow margins dropped as revenue growth continued to slow and expense growth continued to surpass revenue growth," the report says.
These preliminary medians are based on FY 2013 audited financial statements of about 45% of Moody's entire rated portfolio. Final medians for FY 2013 will be released this summer.
Moody's analyst Jennifer Ewing says the factors contributing to this grim economic report include low rate increases from commercial payers, Medicare and Medicaid rate cuts, a shift in payer mix to more governmental payers, the shift away from inpatient stays to more outpatient and observation care, and an increase in high-deductible health plans.
"Higher levels of patient responsibility [contribute] to increases in bad debt and lower healthcare demand," Ewing says.
In addition to reimbursement challenges, provider organizations have also had to make significant investments to employ physicians and enhance their IT capabilities, she adds. "While this is the first year expense growth has declined, increased expenses associated with employing physicians and IT projects also contribute to the expense growth outpacing revenue growth."
Ewing says hospitals' struggle with declining reimbursements will not be short lived.
"Revenue pressures will be long-term factors given the federal deficit, state and local government budget stresses, employers looking to cut expenses and looking for lower-cost healthcare options for employees, [which will lead] to higher deductibles and co-pays," she says.
Ewing also says the aging population will further drive the shift in reimbursements to Medicare and away from commercial payers and that hospitals and health systems will continue to see revenues dip due to "the push for providers to deliver care at a lower cost, which often means in a lower-cost setting like outpatient visits that are reimbursed at a lower level."
"This trend [in growth rates] will continue at least in the near term given the pressures on revenue growth," she adds. "Furthermore, hospital operators have focused on expense cutting over the last several years and most of the low hanging fruit has been cut, meaning management teams will have to enact deeper cuts and change the way care is delivered before revenue growth keeps pace with expense growth."
Other key report findings include:
- Profitability margins continued to decline. "The preliminary median operating margin and operating cash flow margin declined in FY 2013 for a second year in a row. The declines in both margins come after several years of growth or stability in profitability," according to the report.
- Balance sheet ratios remained stable despite lower cash flow. "The median unrestricted cash and investments increased in FY 2013 compared to FY 2012. This growth is consistent across all rating categories and comes as equity market returns were strong and capital spending levels declined. With the increase in cash, preliminary median days' cash-on-hand increased, while median cash-to-direct debt remained relatively stable. The median cash-to-comprehensive debt improved as discount rates increased and market returns were strong, reducing defined benefit pension plan liabilities," the report says.
The median annual expense growth rate in this report does not incorporate the full effect of the Patient Protection and Affordable Care Act because coverage under the individual mandate was not enacted until January 1, 2014.