Moody's: Children's hospitals outperform adult hospitals even as expenses rise

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A new report from Moody's Investors Services said children's hospitals in the U.S. will continue to hold their financial advantage over adult hospitals. (Getty/everydayplus)

Plenty of concerns have been raised in recent months about shrinking hospital margins, but there's one sector of the hospital industry that's less susceptible to the squeeze: Pediatric hospitals.

A new report from Moody's Investors Services said children's hospitals in the U.S. will continue experiencing better revenue growth to drive margins that are at least 3-4 percentage points over adult hospitals next year. The trend remains consistent despite increasing expense pressures on children's hospitals, which exceeded revenue growth for the third year in a row at children's hospitals.

"Historically, children's hospitals have outperformed adult hospitals for various reasons including strong demand for pediatric services and much less relative competition for children's hospitals," Lisa Martin, senior vice president at Moody's, told FierceHealthcare. "Some of them are the sole provider for pediatric services in their market."

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The analysis was based on audited 2017 financial statements for 20 children’s hospitals that are eligible to be included in the medians, representing 5% of all rated healthcare entities.

RELATED: Moody's: Rising U.S. healthcare costs could hit other sectors of the economy

Martin pointed to the multiple sources of funding that children's hospitals enjoy, including well-established fundraising machines to raise gifts for capital projects.

These hospitals also have strong liquidity and fundraising to provide resources to mitigate higher expenses and fund robust capital spending to meet demand for clinical growth and research programs without excessive leverage, Moody's said. The median days cash on hand for children’s hospitals of 420 days significantly exceeded the adult hospitals median days cash on hand of 210 days.

It's not all smooth sailing, however. Children's hospitals have a high dependency on Medicaid funding and face the risk of budget cuts in state Medicaid—their largest source of revenue. On average, more than 50% of gross revenues at children's hospitals come from Medicaid, compared with about 15.5% for adult hospitals.

RELATED: Moody's report shows trouble on horizon with 'unsustainable path' for nonprofit hospitals

The risk around Medicaid funding varies state by state, Martin said.

"There are other pieces of the Medicaid programs that could affect children's hospitals. One could be just the Medicaid rates that they derive from states which, in general, are seeing rising costs related to Medicaid and are looking for strategies to curb those," Martin said. "Children's hospitals also typically receive supplemental types of Medicaid funding so to the extent that those are cut there are risks to children's hospitals."

Children’s hospitals will continue to face greater difficulties controlling costs than adult hospitals, Moody's analysts said, due to shortages in pediatric clinicians and staff, as well as higher research and teaching costs.

"Because children's hospitals are very specialized in high-end pediatric services, it tends to be harder to recruit pediatric clinicians and staff," Martin said. "They get hit a little harder with shortages in clinical areas than adult hospitals do."

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