Healthcare Business Trends

NFP hospital revenue growth tops expense growth for first time in three years: Moody’s

September 9, 2019 9:28 pm
  • An acceleration in revenue growth in the not-for-profit (NFP) hospital sector occurred despite issues with commercial health plan payments and only a small increase in inpatient volume.
  • Expense control was credited to steps such as a tighter focus on employee salaries and benefits.
  • Earlier, Fitch found improvement in NFP hospitals’ operating margins for the first time in two years.

Median growth rates in not-for-profit (NFP) hospitals’ 2018 operating revenues surpassed expense growth for the first time in three years, according to Moody’s Investor Service.

Median revenue growth for the 284 NFP hospitals and health systems tracked by the rating agency reached 5.5% in 2018, while expense growth slowed to 5.4%. Revenue growth remained well below the 2015 peak of 7.8%.

The revenue increase occurred despite “ongoing reimbursement challenges” and small inpatient volume increases compared with outpatient visits. Payment challenges included a decline in commercial health plan revenue as a share of gross revenue and an increase in “less lucrative” Medicare payments.

The second consecutive year of slowing expense growth was credited to “aggressive cost-reduction strategies,” including in the areas of salaries and benefits, supply management and care settings.

Cash balances stagnated at $536.8 million in 2018 from $534.2 million due to merger-and-acquisition (M&A) initiatives and weaker equity market returns, according to Moody’s.

Although margins largely held steady, they remained well below past levels. The 1.8% median operating margin was a small improvement from 2017, but the operating cash flow margin slowed from  8.1% to 7.9%.

Moody’s also found that NFP hospitals in 2018 had:

  • 200.9 median days cash on hand, down from 206.6 days
  • $63.7 million in median additions to property, plant and equipment — down from $65.7 million
  • A 1.1% median growth rate in total admissions (inpatient admissions plus observation stays)
  • A 2.9% increase in outpatient visits

Patient trends indicate shift to less-expensive care sites

For the first time in three years, NFP hospitals had an increase, to 2%, in the median growth rate of outpatient surgery volume. However, that was still far behind the 4% increase that occurred in 2015.

The lack of a median increase in emergency room visits was credited to hospitals’ shift of more cases to their urgent care centers or to the impact of increased competition from outpatient competitors.

Median inpatient admissions increased by 1.1%, compared with 0.8% in 2017. But that too was far less than the more-than 2% increase in 2015.

The median growth rate in combined admissions and observation stays slowed to 1.1% in 2018, compared with 1.7% in 2017. Moody’s analysts wrote that the change occurred because hospitals “more aptly balanced the use of inpatient versus 23-hour stays.”

Fitch findings reveal improvement, but sector outlook remains negative

In August, Fitch Ratings similarly found an improvement in operating margin for the first time in two years among the 220 NFP hospitals it tracks.

However, Fitch maintained its negative sector outlook, “which reflects classic historic pressures on operating performance such as labor and wage pressures for experienced staff, particularly given the tight U.S. labor market and the increasing need for clinicians.”

Other key findings in Fitch’s report on NFP hospitals included:

  • Balance sheet metrics remain highly consistent and stable across key measurements: days cash on hand, cash to debt, and leverage metrics.
  • Operating margins are improving incrementally, most notably at the lower end of the rating spectrum.
  • Sector pressures will persist, but stability is likely over the longer term.
  • Growth in median operating margin improved to 2.1%, and growth in operating EBITDA margin improved to 8.55% — from 1.90% and 8.46%, respectively, in 2017.

Improvement in operating income levels primarily stemmed from incremental expense-control initiatives (such as supply savings) and labor productivity improvements that offset continued revenue constraints in most markets, Fitch stated.


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