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Analysis

Nonprofit Hospital Operating Margins Improve for First Time Since 2016

By Jack O'Brien  
   September 03, 2019

Fitch Ratings added in its report that the nonprofit healthcare sector has displayed "considerable resiliency."

As provider organizations have grown increasingly concerned about maintaining strong operating margins in the face of annual deterioration, a new report indicates that health systems might be changing the narrative.

Nonprofit health systems experienced an improvement in financial medians for operating margins in 2019, breaking part of a two-year slump, according to a Fitch Ratings report released Tuesday morning.

The largest concentration of margin improvement came from the BBB and below-investment grade (BIG) end of the spectrum, which represent 25% of Fitch's portfolio, while the AA category also saw its profitability increase, accounting for 28% of the portfolio. Fitch's findings are based off of audited data from 2018.

Median operating margins for nonprofit provider organizations increased 2.1%, while median operating EBITDA improved by 8.55%. This turnaround after two years of declining financial metrics across every rating category was due in large part to "incremental expense control initiatives" and labor productivity improvements, according to the report.  

Related: 3 Strategic Differences Between Nonprofit and For-Profit Hospitals

Fitch added that the nonprofit healthcare sector has displayed "considerable resiliency" in recent years, and though the sector has begun to stabilize, it has not fully overcome its two-year operational downturn. 

Perhaps the strongest financials for nonprofit healthcare organizations were the "extremely stable" liquidity metrics, despite considerable market volatility at the end of 2018.

Both days cash on hand and cash to debt remained relatively unchanged, year-over-year, with Fitch stating that the overall metrics matched all-time highs for the sector.

Additionally, nonprofit health systems maintained a stable median debt-to-capitalization ratio of 34% and Fitch projects a healthy long-term outlook for the sector.

Related: Nonprofit Hospital Consolidation to Continue in 2019

The Fitch report's findings were in line with a recent report on the financial medians for children's hospitals, which included strong profitability and leverage metrics in the face of increased capital spending.

Still, despite the positive metrics, Fitch holds a negative short-term sector outlook, highlighting the challenges of a tight labor market and the growing physician shortage.

The ratings agency also pointed to concerns about the shift to from fee-for-service to value-based care and the emergence of non-traditional players in the healthcare space.

Related: 'Unsustainable Path': Nonprofit Hospital Finances Face Troubling Trend

Jack O'Brien is the finance editor at HealthLeaders, a Simplify Compliance brand.


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