The outlook for U.S. not-for-profit healthcare providers remains negative for the year ahead, with smaller hospitals likely to bear the brunt of the financial pain, according to the latest analysis (PDF) from Moody's Investors Service.
Pressure on top-line revenue growth, a result of a shifting payer mix and patient volumes, plus investments in physician practices, electronic health records and information technology systems will continue to squeeze margins in the next 12 months, Moody's predicts.
“Hospitals have exhausted many of the 'low-hanging fruit' strategies to preserve margins over the last several years, and we expect further expense reductions will be harder to achieve,” Moody's analysts report.
One of the main drivers behind the analysts' forecast is the expectation that operating cash flow growth will be slow in 2015. Median estimates range from -0.5% to 1.5%, far below the 7% growth in cash flows reached in 2009.
Though large hospital systems—those generating annual revenue greater than $2 billion—may grow their operating cash flows by as much as 3% to 4%, Moody's projects that small hospitals—those with revenue less than $500 million—may see their operating cash flows fall by at least 2%.
“We expect this trend to continue over the next several years, as reimbursement growth slows and hospitals rely on cost cutting and productivity gains to generate the majority of cash flow growth—trends that, in general, favor larger hospitals,” the analysts said in a report issued Thursday.
This comes on the heels of news that several of the largest not-for-profit health systems in the U.S. reported strong operating margins for the most recently ended quarter. Kaiser Permanente, Trinity Health and Providence Health & Services all have reported improved operating margins for the quarter ended Sept. 30, compared with the same period last year.
The expansion of Medicaid eligibility in several of the states where Renton, Wash.-based Providence operates its hospitals—California, Oregon and Washington—is one driver of the system's higher margin. Its Medicaid revenue was up 19% in the first nine months of the year.
Medicaid expansion versus non-expansion is expected to play a major role in 2015 fiscal year performance of not-for-profit hospitals and health systems across geographies.
Healthcare organizations in states that have expanded Medicaid eligibility are more likely to experience declines in their bad debt, whereas those that did not choose to expand the federal program will not see this impact. For example, bad debt dropped 5.6% through June 2014 in states that expanded Medicaid, but it was up 6.8% in states that did not expand eligibility.
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