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Not-for-profits' expenses continue to outpace revenue growth, Moody's finds


By Rachel Landen
Posted: April 23, 2014 - 3:45 pm ET
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The not-for-profit hospital sector is seeing margins tighten and cash flows decline, according to a new report from Moody's Investors Service. Expense growth continues to outpace revenue growth for the second consecutive year, the service reported.

Moody's looked at fiscal-year 2013 audited financial statements for close to 45% of its rated portfolio of 448 not-for-profit hospitals and health systems and found that their expenses grew at an annual rate of 4.6%, while their revenue grew at an annual rate of 4.1%.

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Both grew more slowly than in 2012. But with expenses accelerating faster than revenues, operating margins and operating cash flow margins dropped across the industry.

“The declines in both margins come after several years of growth or stability in profitability,” Moody's analyst Jennifer Ewing wrote in the report.

Slower expense growth is indicative of a cost-containment focus among hospital operators, as well as a shift of care to lower-cost and more efficient settings, Ewing wrote.

Small rate increases from commercial payors, rate cuts from Medicare and Medicaid, and a move from commercial payers to governmental payers also affected performance.

The number of high-deductible health plans increased in 2013, which can lead to larger financial obligations for patients, and subsequently, more bad debt for hospitals, additionally affecting margins, Moody's said. Margins were also affected by the trend toward more outpatient visits, which contributed to lower reimbursements.

Even though cash flow wasn't as robust for 2013, Moody's found that balance sheet ratios remained stable. Unrestricted cash and investments were up for the year because equity-market returns were strong and capital spending declined.

Moody's plans to publish another report this summer that will include a larger sample size, as well as hospitals with calendar year-end audits after Sept. 30, 2013. In doing so, Ewing wrote that they “expect the final medians to show weaker operating performance than the preliminary medians.”

However, the anticipation is that healthy balance-sheet ratios will be maintained.

Follow Rachel Landen on Twitter: @MHrlanden


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