Aug. 26—Expenses grew faster than revenue at not-for-profit hospitals in FY12, according to Moody’s Investors Services.

Not-for-profit hospitals’ 5.2 percent revenue growth in the past fiscal year was eclipsed by a 5.5 percent increase in expenses, the ratings agency concluded in a report released Aug. 23. 

The “unsustainable” higher increase in expenses followed the FY 2011 revenue growth of 5.4 percent and a 5 percent rise in expenses, according to the report.

Other bad news for hospitals included in the report was a decline in the median operating cash flow margin from 9.2 percent in FY11 to 8.9 percent in FY12.

“The FY12 medians highlight the challenges of operating with lower volumes and revenue growth, higher exposure to government payers, and increased expenses,” wrote the report’s authors.

The rating agency maintained a poor FY13 operating outlook for not-for-profit hospitals. Moody’s Aug. 15 Weekly Credit Outlook for Public Finance concluded that Medicare’s recently finalized inpatient rate increase was small enough to count as a "credit negative" in future credit ratings of not-for-profit hospital debt. The agency concluded that the 0.7 percent inpatient prospective payment system increase—0.5 percent for hospitals not participating in a quality improvement program—was "materially below the pace that hospital costs are rising."

The FY13 outlook was “weak,” according to Moody’s latest assessment, because most hospitals continue to operate in a largely fee-for-service structure with no expected increase in the volume of admissions.

“We expect the transition to a value-based reimbursement system will be highly disruptive for most hospitals and impact performance in FY13 and in the coming years,” according to the report.

Further negative impacts on the hospitals’ financial health include cuts required the ongoing federal sequestration and Affordable Care Act cuts to the Medicare disproportionate share hospital program. Hospitals also were garnering lower than historical rate increases from commercial payers.

The Moody’s report projected that many hospital management teams will respond to declining revenue growth by “aggressively” reducing expenses. However, such savings may prove elusive since many cost savings measures—such as staffing and benefit cuts—were already used after the last recession began.

Publication Date: Monday, August 26, 2013