Not-For-Profit, Stand-Alone Hospitals See Improvement

John Commins, July 22, 2010

After three years of decline, the nation’s stand-alone, not-for-profit hospitals stabilized balance sheets in 2009 and saw improvements in other key operating metrics. This results in pre-recession levels similar to 2006. This improving trend is expected to continue through 2010, despite the uncertainty surrounding the economy and healthcare reform, according to Standard & Poor’s.

“Since the 2008 median report and in response to the broader global economic challenges that began in late 2007, we have seen management teams at many hospitals sharpen their focus on tightening expenses and strengthening revenue cycle performance, which has yielded better operating margins in many cases,” S&P states. “At the same time, the investment and financial markets have shown signs of recovery this past year after much instability. We believe that along with more prudent management of capital investments and spending levels, this helped stabilize balance sheets for many rated stand-alone hospitals.”

S&P says the improvement is reflected in fewer credit rating downgrades in the first half of 2010, and nearly as many upgrades as downgrades.

“In our opinion, management teams spurred operational improvements by returning to the basics with a focus on strengthening market positions, improving processes, and reducing costs,” S&P says. With severe constraints on non-operating revenue, S&P said many hospitals exerted tighter control of expenses and held off on major capital projects to focus on operations and to retain cash balances.

“More specifically, these stricter expense policies included tighter staffing levels and focus on patient-throughput processes as well as salary and benefit freezes or cutbacks,” S&P says.

For the past decade, S&P said, stand-alone, not-for-profit hospitals have been a good credit risk thanks to strong non-operating income, growing liquidity, and solid operations. However, the recession has created a challenging environment.

“We are optimistic about the initial improvement reflected in the 2009 medians and fiscal 2010 year-to-date results. However, we are also mindful of ongoing economic and industry pressures such as weaker volumes, potential state Medicaid funding reductions, capital upkeep needs, and the still unknown impact from the passage of the Patient Protection and Affordable Care Act,” S&P says.

Providers are showing improved performance using expense-control measures, but there is still the question of: can these gains be sustained?

The financial performance of individual hospitals often was influenced by their respective fiscal years. For example, hospitals that ended their fiscal year on June 30, 2009, were more likely to report depressed non-operating earnings, while hospitals that ended the fiscal year on Dec. 31, 2009, were more likely to enjoy stronger earnings because of improving investment markets, and because the hospitals had recorded their biggest investment losses in the previous fiscal year.

John Commins

John Commins is a senior editor at HealthLeaders Media.

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