Fitch says hospital margins have improved--for now

hospitals
Hospitals.

While the operating medians for non-profit hospitals improved in 2015, Fitch Ratings forecasts some volatility in the near future.

The median operating margin for non-profit hospitals improved to 3.5 percent in fiscal 2015, up from 3 percent in fiscal 2014, according to Fitch. Pre-tax margins improved to a median of 10.3 percent last year from 9.7 percent in 2014. It attributed the improvements to greater efficiency in care delivery, more patients with health insurance coverage and improved efforts at revenue cycle management and fee collections.

But the report suggested those gains may be short-lived.

“Over the next 36 months we believe the movement to risk-based payer contracts from managed care contracting is likely to gain momentum, mainly because their most common proponents, larger and more integrated health systems, have emerged in several major metropolitan areas. This transition will likely heighten existing pressure on operating margins,” Fitch said in a statement. “The likelihood of margin compression will be greater for hospitals with less experience in managing risk and those with smaller revenues bases and mostly fixed expenses.”

The report reasserts doubts Fitch had expressed in its 2016 forecast. While it had issued an overall stable outlook for the sector, it had expressed pessimism for the long-term, saying it would be challenged by ongoing risk-shifting from payers and increased consumerism.

However, bright spots remain. Last year, Fitch noted that hospitals enjoyed their first organic growth in patient admissions since the start of the Great Recession in 2008. Last year, Moody's Investors Service had relented on its negative long-term forecast for the sector, citing an increase in cash flow and an influx of more insured patients, abetted by the Affordable Care Act. Like Fitch, it noted earlier this year that hospital medians were quite healthy.

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