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Nonprofit Operating Margins Struggle Despite Strong Balance Sheets

Analysis  |  By Jack O'Brien  
   September 21, 2018

Operating margins remain under significant financial pressure as the entire sector responds to ongoing stress, according to a new report from Fitch Ratings. 

For the second year in a row, nonprofit health system operating margins have seen clear credit deterioration despite the strength of balance sheet metrics.

According to a Fitch Ratings report issued Thursday, operating margins have suffered in recent years but managed to secure an "A" rating while balance sheet levels have achieved an all-time high rating of "AA-."

The report is in line with previous studies from other ratings agencies and healthcare consulting firms that have looked at a growing system-wide issue associted with operating margins, especially for nonprofit hospitals. 

Fitch associated the declines with the rising costs of pharmaceutical drugs, salary and wage expenses, along with the "difficult transition" from volume to value based care.

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

Related: Hospital Operating Margins Slide 39% After ACA Expansion

Though every single balance sheet metric rose, according to Fitch, operating margins dropped "across the board." Additionally, Fitch's analysis of two new metrics: cash to adjusted debt and net adjusted debt to adjusted EBITDA are expected to extend the credit gap in the company's ratings on top of other sector pressures.

Below are some highlights from the Fitch report:

  • Year-over-year revenue growth dropped from 6.4% to 6.1%.
  • Median operating margins dropped from 2.8% to 1.9%, while operating EBITDA dropped from 9.5% to 8.5%.
  • Days' cash on hand rose from 195.5 in 2017 to 213.9, cash to debt dropped from 159% to 142.8%.
  • Median debt to capitlization also rose from 34.3% to 37%, as part of what Fitch called "the sector’s longerterm
    trend toward a moderating leverage position."

Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.

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