Fiscal Pressures Mount for Non-profit Healthcare

The not-for-profit hospital sector saw expenses grow faster than revenues in 2016, reversing recent trajectories as key financial metrics underperformed despite increased volumes.

The not-for-profit and public healthcare sector annual expense growth outpaced revenue growth despite increased volumes, according to fiscal 2016 medians compiled by Moody’s Investors Service.

“The higher expenses coupled with positive, albeit slower, revenue growth, contributed to lower profitability, tempered liquidity growth and moderation of nearly all financial metrics,” Moody’s said. “Tighter margins will weigh on the sector going forward as reimbursement pressures and expenses increase.”

Despite slowing in 2016, Moody’s said revenue growth for the sector remains healthy relative to historic levels.

In particular, Moody’s noted that:

• Compounding pressures of slower revenue growth and rising expenses increasingly challenged hospitals.  After years of cost containment, annual expense growth of 7.2% widely outpaced annual revenue growth of 6.0%. This dynamic led to absolute operating cash flow contraction of -4.5%. Moody’s expects that revenue growth will continue to lag behind expenses.  

• Growing expense and revenue pressures contributed to financial measures falling from fiscal 2015 highs. Despite a slowdown in financial momentum, median operating performance remains solid. However, a growing number of hospitals confronted financial stress in fiscal 2016. Going forward, intensifying revenue and expense pressures will continue to be challenging.

• Unrestricted cash and investments showed nominal growth, while relative measures declined moderately from peak levels. The modest strengthening of unrestricted cash balances was obscured by accelerated expense growth. Higher expenses shifted the growth rates of all major balance sheet measures lower, softening some key balance sheet ratios.

• Key volume indicator levels increased with growth of outpatient volumes remaining stronger than inpatient. Though all absolute volumes rose, growth rates in admissions and outpatient surgeries were sluggish relative to fiscal 2015. Despite improved technologies, population health initiatives and cost-conscious pricing strategies, the slowed growth trend for outpatient services suggests increased competition.

• Widened pension funding gaps stress balance sheet and income statements. The funded ratio percentage per generally accepted accounting principles declined in 2016, continuing an annual trend of decline since 2013. Soaring labor costs due to an emerging nurse shortage, higher drug costs and technology investments are also hiking expenses.

• Evolving reimbursement policies, such as a shift to value-based models, stressed revenue growth. The ongoing shift of clinical care to lower-reimbursed outpatient settings also affected revenue growth.

• Tight state budgets will pressure future Medicaid spending, despite climbing to 14.7% of gross hospital revenues in 2016. Similarly, federal budget deficits strongly suggest Medicare spending will be curtailed.

The medians are based on audited 2016 financial statements for 323 freestanding hospitals, single-state health systems and multi-state healthcare systems representing 81% of all rated healthcare entities.

Moody’s rates 397 unique not-for-profit hospitals with approximately $177 billion of rated debt. The median rating for the not-for-profit healthcare sector is A2.