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Not-for-Profit Hospitals Show Stability in a Challenging Market

 |  By John Commins  
   September 04, 2012

Many not-for-profit hospitals have done a good job stabilizing margins after the Great Recession but still face continued challenges with flat inpatient volumes, healthcare reform mandates, and lower reimbursements linked to government budget pressures, a new report from Moody's Investors Service says.

The bond rating agency's report, U.S. Not-for-Profit Hospital Medians Show Operating Stability Despite Flat Inpatient Volumes and Shift to Government Payers, shows that balance sheet measures improved and cash and investments portfolios remained highly liquid. However, weak investment returns over the past year have stagnated balance sheets for most hospitals.

Overall, the financial outlook appears to be improving for not-for-profit hospitals, as executives look for new ways to cut expenses in the face of weaker revenue growth and further changes to federal healthcare policy and regulations over the next few years.

"There will be pressures going forward, but management teams have done a good job so far of responding to the recession and the changes in the healthcare market," Moody's analyst and report author Sarah Vennekotter tells HealthLeaders Media.

Even with flat inpatient admissions in FY2011, not-for-profit hospitals recorded a median expense growth rate of 5% against a median revenue growth rate of 5.3%. That represents a slight uptick from FY2010, which saw revenue and expense growth rates of 4.2% and 4.1%, respectively.

Vennekotter anticipates continuing challenges in FY2013, including lower payments for inpatient procedures from all payers as incentives and mandates for efficiency and quality move more patients to outpatient settings. For example, the median growth rate in observation stays has continued to improve incrementally each year, from 7.4% in FY2008 to 8.2% in FY2011.

"Growth in observation stays has been strong in the last couple of years," Vennekotter says. "That's because Medicare [Recovery Audit Contractor] audits have come in and hospitals have been forced to reevaluate how they document and code patient care when, for example, they come to the ER. We will continue to see that as Medicare continues to monitor hospitals to ensure that they are properly coding inpatient admissions and observation stays."

Other financial pressures in FY 2013 will include the ongoing federal budget woes, which will probably mean more Medicare and Medicaid reductions for hospitals on a per-patient basis. In addition, margins are likely to weaken as hospitals contend with losses on employed physician strategies.

While managers initially looked to salary and benefits cuts to reduce expenses, Vennekotter says they may soon have to go elsewhere. "You can't keep cutting expenses year over year when it comes to employee salaries and benefits," she says. "In terms of expense reductions beyond the low-hanging fruit of salaries and benefits, hospitals will look to transition to providing healthcare in lower-cost settings and being more efficient, which will be much more difficult to implement than reducing salaries and benefits. It's going to be more difficult for management teams to find places to cut expenses, but not impossible."

Lisa Martin, Moody's senior vice president for the Public Finance Group, says finding new ways to reduce costs will become increasingly difficult for hospital managers.

"That is because what we are talking about is reducing expenses by redesigning entire processes," Martin says. "So it is not just a question of reducing headcount. It's a question of reducing things like length of stay and improving back office support functions to reduce the amount of time between admission and discharge, which involves changing an entire process. That is a much more difficult strategy than just cutting the low-hanging fruit."

The Moody's report also found that:

  • Median growth rate of inpatient admissions remained flat in FY2011 at 0.1% growth, following a 0.4% decline in FY2010 and zero growth in FY2009.
  • Growth in governmental payers continues as Medicaid now represents 13% of gross revenues, up from 12.4% in FY2010. Medicare grew to 43.7%, up from 43.4%. Median revenue from managed care, Blue Cross / Blue Shield, and other commercial payers declined for the third consecutive year.
  • Although the median debt load at not-for-profit hospitals increased to $191.9 million in FY2011, up from $189.3 million in FY2010, the median rate of change for debt outstanding was a decline of 1.6%.
  • Median days cash on hand was 165 days, up from 159.8 days in FY2010, and nearly approaching the FY2007 median of 172.8 days seen prior to the economic downturn and severe market losses.

Martin cautioned that the approximately 800not-for-profit hospitals reviewed by Moody's for bond rating purposes are only a fraction of the estimated 5,000 not-for-profit hospitals in the United States, and thus may not accurately reflect the overall health of the sector. "There are many out there that are struggling, and many of them we do not have readings on," she says. "There is a wide variation in operating performance within the portfolio we do maintain. While the median is up a little on some measures, there is a big disparity between those that tend to be the larger health systems in multiple regions or markets compared with some of the smaller standalone hospitals that are struggling now, and that is even before some of the negative effects of federal budget cuts and other Medicare pressures."  

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John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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