2012 may have been 'high water mark' for hospital finances, Fitch says

The operating performance of not-for-profit hospitals and health systems rated by Fitch Ratings improved in 2012. But last year may be the “high water mark” for hospital finances as demand from patients grows increasingly weak and reimbursement cuts continue, a Fitch analyst warns.

The median operating margin among Fitch Ratings' portfolio of not-for-profit hospital operators was 3% in 2012. That's compared with 2.7% the prior year and 2.7% on average since 2006. Tight control over expenses and efforts to reduce operating waste helped bolster hospital margins, Fitch said in a newly released report. Profits also grew as hospitals did more to collect bills. Some benefited from market clout as well, the report said.

But Jim LeBuhn, a senior director for the New York-based credit rating agency, said that margins will likely slip and finances will weaken this year, which has already seen a continued slump in patient demand. “For lack of a better word, people were surprised” by the volume decline's depth earlier this year, and the sag has not abated, he said. “This may be the high water mark” for hospitals' financial performance, he said.

The rating agency's report is among the latest to highlight the sluggish growth at U.S. hospitals, a trend that's projected to continue as patients respond to the weak economic recovery and larger medical bills, and hospitals react to health policy that seeks to keep patients from being admitted.

The compound annual growth rate for hospitals and health systems for 2005-12 was 5.5%, the Fitch report said. That's compared with 5.1% annual growth in expenses.

Further scheduled cuts to reimbursement under the Patient Protection and Affordable Care Act will also add strain to hospital finances, Fitch analysts said.

During the first half of this year, Fitch analysts downgraded 11 health systems or hospitals and said the outlook was negative for another 15. That's compared with a credit rating upgrade for five hospitals and health systems during the same six months and a dozen for which the outlook was positive.

Expect more merger and acquisition activity as a result of the mounting financial pressure, LeBuhn said.

Dealmaking across hospitals has been steady and has included some megamergers, such as the May deal that combined Trinity Health and Catholic Health East; Tenet Healthcare Corp.'s $1.73 billion deal for Vanguard Health Systems; and Community Health Systems $3.9 billion offer for Health Management Associates.

Those systems with strong balance sheets will be best able to “make strategic investments in consolidating industry and an increasingly competitive marketplace,” the Fitch Ratings report said.

Last year saw cash cushions improve among hospitals and health systems rated by Fitch, as measured by the number of days that hospitals' cash reserves could cover operating costs. The median increased 1.2% to 183.9 days from 181.7 days in 2011, the fifth year of increases.

Stronger investment returns, limited borrowing and strategic capital spending helped hospitals to increase the cash stockpile, Fitch said.

Follow Melanie Evans on Twitter: @MHmevans