Moody's: Hospital expenses continue to outstrip revenue growth

Not-for-profit hospitals continue to operate under tough revenue pressures, a new report by Moody's Investors Service concluded.

Although overall not-for-profit finances remain stable, they continue to struggle against deficits and weak revenue growth. In 2013, expenses grew by 4.6 percent, while revenues grew by only 4.1 percent--the second year in a row that has occurred, according to Moody's.

"Factors leading to the decline in performance include low rate increases from commercial payers and rate cuts from Medicare and Medicaid," said Jennifer Ewing, a Moody's analyst, in a statement. "There has also been a shift in the mix of payers to more governmental ones from commercial ones."

The report is based on an analysis of financial data for about 45 percent of the hospitals in Moody's ratings portfolio. "We expect the final medians to show weaker operating performance than the preliminary medians due to the inclusion of more hospitals with calendar year-end audits," the report said.

Medicare payments comprised 44.3 percent of patient revenue last year, compared to 43.9 percent in 2012 and 43.7 percent in 2011, according to Moody's preliminary data. Commercial revenue comprised 32.1 percent of the total in 2013, down from 33 percent in 2012 and 34 percent in 2011. Medicaid has remained mostly unchanged, as many of the newly insured from the Affordable Care Act did not start coming into the system until last fall, Moody's noted.

Preliminary median operating margins for hospitals were slightly more than 2 percent--down from the nearly 3 percent that was customary in 2010. Median cash flow margins also dropped from 10 percent in 2010 to around 9 percent last year.

Moody's has regularly reported that not-for-profit hospitals are under financial pressure. A report it issued last month suggested that they could lose as much as $4,000 per patient under the implementation of the two-midnight admission rule, which remains pending. Another report suggested that narrow provider networks in the health insurance exchanges could also cause problems for hospitals.

However, there are other bright spots for hospitals, such as reductions in capital spending and strong returns on investments, which grew the available unrestricted cash on hand from a median of $255 million in 2012 to $285.7 million last year.

To learn more:
- read the Moody's statement
- read the report (subscription required)

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