Hospitals appear to be profiting from their recent efforts to hike prices, improve collections and capitalize on higher demand.
Despite skyrocketing expenses for labor and other costs, even bigger growth in revenue boosted operating margins of not-for-profit hospitals last year, according to reports from two rating agencies that affirmed their stable outlooks on the industry last week.
Moody's Investors Service said median profit margins of the approximately 500 hospitals and health systems it rates increased to 1.4% last year, from 0.7% in 2000 and 0.6% in 1999. Similarly, 177 general acute-care credits tracked by Fitch Ratings reported a median operating margin of 1.5% last year, up from 1.2% in 2000 and 1% in 1999.
Both agencies said revenue growth outpaced rising costs. According to Moody's, median operating revenue grew 8.9% last year, compared with an 8.2% growth in expenses.
Fitch attributed strong net patient revenue to higher utilization, better managed-care rates and diminishing effects of Medicare cuts. And despite a labor shortage, personnel costs dropped to 51.2% of total operating revenue in 2001 from 52.2% in 2000, Fitch said.
Better operating performance helped hospitals improve their debt service coverage for the second year in a row despite taking on about 10% more debt, Moody's said. Cash flow also swelled because of better operating margins and smaller accounts receivable balances.
Among the trouble spots, hospitals could face bigger declines in investment portfolios in 2002 than they did last year. Hospitals continue to face stiff competition for outpatient surgeries, which grew only 1.4% last year compared with 4% in 2000 and 5.2% in 1999, Moody's said. Overall admissions rose 3%.
Echoing its outlook published in January, Moody's said it continues to believe healthcare credit will remain stable during the next 12 to 18 months, although "considerable" uncertainty exists beyond that. Reflecting that increasing stability, Moody's said it upgraded nine not-for-profit hospitals and health systems in the second quarter, the most since 1998.
-With Patrick Reilly