Good or bad? Hospital profitability hits a 10-year low

Hospitals’ profitability margins are at a 10-year low as the patient mix skews more toward lower-paying Medicare beneficiaries, while other patients seek care elsewhere, according to Moody’s report, “Not-for-profit and public healthcare – US: Preliminary medians underscore negative sector outlook.”

The hospital industry’s median operating cash flow margin fell to 8.1 percent — levels not seen since during the 2008-09 recession – and Moody’s analysts expect the suppressed level will continue over the next year.

Shifting payor mix and lower demand stressed revenue growth, according to the report. Median growth of Medicare as a percentage of revenue increased to 1.6 percent from 0.6 percent in 2016 while the median growth of commercial payors was a negative 1.9 percent.

There will be no more revenue growth from expanded coverage due to the Affordable Care Act, as all of the benefits have been “essentially realized” and fewer people are expected to enroll in the exchanges, the authors write. In fact, revenue growth will now be even more strained by rising bad debt as the number of uninsured increases with repeal of the individual mandate.

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Demand for hospital care also slowed, as median growth in outpatient visits (2.2 percent) continued to outpace median growth in inpatient admissions (1.2 percent).

“The aging population, growing bad debt and a lower rate of reimbursement increases will continue to add credit stress,” the authors write. “New strategies to stimulate revenue growth will be integral as hospitals and health systems exhaust cost reduction efforts.”

Baa and lower-rated credits, which are typically comprised of smaller hospitals, were disproportionately affected by these pressures, generating median operating margins of -0.2 percent and 0.1 percent respectively, below the national median of 1.8 percent and well below the Aa median of 3.4 percent.

“Generally, smaller hospitals have less negotiating power with insurers, provide lower acuity services and have more difficulty attracting physicians, creating more operating stress,” the authors write. “We expect small rural and community hospitals to seek capital partners as competition increases, and revenue and expense challenges intensify.” Exacerbating hospital profitability is increased labor costs due to a shortage of nurses, according to a separate Moody’s report, “Nursing shortage will pressure hospital margins over the next three to four years.”

While nurse training programs and student enrollment are increasing, it will take several years before the supply of nurses can meet the demand, according to the report. In the interim, labor costs associated with recruiting, retaining and developing nurses will strain margins.

“Labor is the largest expense category for hospitals at about 51 percent of operating expense,” the authors write. “Strategies to address the lack of nurses will compound existing expense pressures and negatively affect hospital margins.”

While an aging population and chronic disease management will drive increasing demand for nurses nationwide, there will be higher demand for nurses in the South and West because of stronger population growth in those regions than in the North and East.

Rural hospitals will be more adversely affected, according to the report.

“Most rural communities cannot match the compensation offered by urban hospitals and will be disproportionately affected,” the authors write.