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

A report from Moody's Investors Services this week which shows the growth of expenses is outpacing the growth of their revenue. (Getty/whyframestudio)

Nonprofit and public hospitals in the U.S. are increasingly facing a pretty daunting financial picture. 

The latest evidence: A report from Moody's Investors Services this week shows the growth of expenses is outpacing the growth of their revenue. That gap is putting the sector on an "unsustainable path," Moody's reported in its research announcement. 

"Revenue pressures continue to overshadow expense-saving initiatives," said Moody's Analyst Rita Sverklik in a statement.

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Part of the problem? The shift to value-based care, including less costly outpatient care, is working. 

According to the report from Moody's, the median outpatient visits growth rate exceeded the median admissions growth rate for the fifth straight year as the sector shifts to less costly care. "Reversing sluggish volume trends and growing profitable service lines will be critical to improving the sector's financial trajectory over the near term," the report said.

How is this translating to nonprofit hospital margins? Even though the median annual expense growth rate slowed from 7.1% in 2016 to 5.7% in 2017, the annual revenue growth rate slowed more quickly from 6.1% in 2016 to 4.1% in 2017. It will remain the largest strain on hospital profitability through next year. 

The report said this is the second year in a row of “significant margin contraction” and is happening in spite of increased merger and acquisition activity, for all of which the report blamed declining reimbursement increases, slowing demand and an increasing portion of revenue derived from government payers.

Revenue cycle management and cost reduction strategies, as well as investment income will be key factors in maintaining debt service coverage metrics if operating cash flow continues to wane, the report said.

This release comes just days after Morgan Stanley, an investment bank and financial services company, released its own concerning analysis that nearly 10% of hospitals are at risk of closure and close to 20% of hospitals are not operating in a "healthy" way. The estimate was based on analysis of data on more than 6,000 hospitals. 

That analysis pointed to risk factors for hospitals included having a higher-occupancy facility nearby, low capital expenditures and a lower operating efficiency index, which measures how well a hospital can turn federal reimbursements into profit. But unexpectedly, hospitals with for-profit status, instead of nonprofit status, were also a risk factor.

The Morgan Stanley analysis also cited new competitors and disruptors—such as retail healthcare—and the rise of high-deductible health plans amid skyrocketing prices as factors impacting hospital profits.