Not-for-profit hospitals are starting to get some relief after a tough three-year stretch of expenses outpacing weak revenue gains.
Fiscal 2014 was a turning point, according to a preliminary report on hospital financial performance from Moody's Investors Service. That's because hospitals are getting better at cost-cutting and revenue is starting to rise more rapidly with the help of greater insurance coverage, an improving economy and consolidation across the sector.
Median revenue growth at not-for-profit hospitals in fiscal 2014 was 4.7%, while the median increase in expenses was 4.6%, according to Moody's. It was the first time since fiscal 2011 when revenue actually grew faster than costs.
“There seems to be at least some degree of stabilization,” said Moody's analyst Mark Pascaris.
Health systems have been getting bigger through mergers and affiliations, which allows them to realize economies of scale. In addition, bad debt and charity-care levels have been falling, particularly in states that have expanded eligibility for Medicaid. And hospitals have been successful in transitioning patients to lower-cost care settings, such as outpatient centers, to help manage their expenses, the report found.
The relief comes after revenue growth reached an all-time low in fiscal 2013, when the median increase was only 3.9%. Hospital expenses, meanwhile, shot up 5% that year.
Moody's cautioned, however, that the preliminary analysis represents only about half of its rated portfolio, or those with a fiscal year-end of September 2014 or earlier. A number of weaker systems have fiscal years that end in December, which could drag down the final results.
In addition, hospitals still face a number of challenges, Pascaris said. More revenue cuts could be coming, particularly from government payers. And while an economic turnaround is generally a good thing, it could also put pressure on wages—a major part of hospital expenses—as employees encounter a better job market.
It's also getting harder to cut costs because most of the obvious areas have already been scaled back, Pascaris added.
“There are still a lot of headwinds in the sector,” he said. “Even when times are relatively benign, I think they'll be cautious.”