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Analysis

'Unsustainable Path': Nonprofit Hospital Finances Face Troubling Trend

By Jack O'Brien  
   August 29, 2018

Nonprofit hospital medians showed expense growth exceeding revenue growth last year, according to a new Moody's report, continuing a troubling trend for health systems.

The gap between expense and revenue growth for nonprofit hospitals grew again in 2017 and is expected to linger as a major financial concern in 2019.

A new report from Moody's found that median annual expense growth at nonprofit hospitals dropped from 7.1% in 2016 to 5.7% in 2017, while the annual revenue growth dropped from 6.1% to 4.6% during the same period of time. 

The study attributes the cause of the revenue slide to some of the usual suspects: lower reimbursement rates, increased M&A activity among providers, and larger ambulatory competition.  Systems were also able to effectively reduce their expense rates through better management of labor and supply costs, the report says.

Related: Nonprofit Exec Pay Growth Outpaces Doctor, Nurse Raises

"Margin pressures led to softened debt coverage ratios, though the median growth rate of total debt has been negative over the last five years," Moody's analyst Rita Sverdlik said in a statement. "Ongoing operating pressures will constrain the ability to reverse these trends, especially if providers turn to debt to fund capital needs."

Below are some of the negatives and positives highlighted in the report:

The negatives:

  • Operating pressues are expected to continue to grow, which coupled with declining revenues will remain a "strain on profitability."
  • 59% of sampled providers saw a decline in absolute operating cash flow, more than doubling the 24% of providers who reported a decline in 2015. 
  • The median government insurance as a percent of gross revenue rose at 45.6% for Medicare and 15.5% for Medicaid, while commercial payers dropped by 31.9%. This trend is expected to continue with an aging population.  

Related: Not-For-Profit Operating Margins Continue to Decline

The positives:

  • Less expensive care options continue to thrive, as median outpatient growth rates exceeded inpatient rates for the fifth consecutive year.
  • The report suggests that improving stangant volume trends and service lines are necessary for short-term financial improvement.
  • Improved cash on hand has assisted nonprofit hospital balance sheets, though the report states that this trend will likely not continue if a there is a decline in the amount of operating cash flow is spent on capital and equity markets. 

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


KEY TAKEAWAYS

Median annual expense growth dropped from 7.1% in 2016 to 5.7% in 2017, but annual revenue growth dropped from 6.1% to 4.6% in the same period of time.

More than half of sampled hospitals saw a decline in absolute operating cash flow, leading to a sizable income contraction.

Less expensive care options continue to thrive, as median outpatient growth rates exceeded inpatient rates for the fifth consecutive year.


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