Last week brought more proof that margins largely withstood economic pressure and again raised the nagging question about whether cuts can continue to outpace weak revenue.
In this week's Modern Healthcare magazine, my colleague Ashok Selvam quoted Standard & Poor's Managing Director Martin Arrick, who said during a conference call last week: “Providers are going to have a harder and harder time offsetting what is an increasingly hostile environment.”
Arrick suggested the financial security of a large health system may be attractive to faltering hospitals in such conditions. “How long can you keep cutting expenditures?” he asked.
Here's what margins look like among independent hospitals rated by Standard & Poor's:
Independent hospitals with credit ratings that hover just above speculative grade (the BBB category) reported median operating margins unchanged in 2010 from 2009 of 1.6%, the Standard & Poor's report said.
Hospitals with strong credit (the A category) reported median operating margins of 2.8% in 2010 compared with 2.9% the prior year.
Hospitals with the strongest ratings (the AA category) reported far healthier margins and an operating improvement in 2010, with median operating margins climbing to 5.1% compared with 4.8% the prior year.
Among health systems, margins were somewhat thinner, but Standard & Poor's noted more systems than solo hospitals are highly rated. Credit ratings reflect more than operating margins.
Expect more operating cuts. The economy's lapsed recovery, potential fallout from the downgrade of U.S. credit by Standard & Poor's, and deficit-reduction efforts could prolong the economic drag on operations. Executives with some large health systems have said provisions of the health reform law will add more strain to hospital finances. As previously reported, some have unveiled plans to slash millions of dollars from operations in coming years.
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