Not-for-profit hospitals had a strong financial performance last year as they benefited from an improving economy, fewer uninsured patients, cost-cutting measures and consolidation.
Two major credit rating agencies this week released reports showing that operating margins have improved for not-for-profit hospitals and health systems. The stronger balance sheet metrics also led both agencies to revise the outlook on the sector to stable from negative.
For the first time since 2011, revenue growth surpassed expense growth, according to the report from Moody's Investors Service. Median revenue growth for healthcare providers rated by Moody's was 5.2% in 2014, while expenses grew at a slower 4.6%.
The revenue increase came as outpatient volume rose more than 2% in 2014. Inpatient volume still declined, at about 1% year over year, but at a slower pace than in 2013.
As a result, for the first time, revenue from outpatient care has surpassed revenue from inpatient services as a percentage of total revenue.
The report from Standard & Poor's found that operating margins increased to 2.7% in 2014 compared with the prior year's 2.1%. Margins were higher for health systems, at 2.9%, than standalone hospitals, at 2.4%.
“Median trends overall were favorable in 2014 and they really provided us with evidence of stability in the sector,” said Jennifer Soule, an analyst at S&P. “Overall, we expect the trends for 2014 to continue through 2015.”
The business environment continues to favor larger providers. For multihospital systems, revenue grew 8.1% in 2014, at the same rate as the previous year. But for standalone hospitals, median revenue growth was only 2.3%, down from 5.5% in 2013.
Systems also tend to have higher credit ratings than standalone hospitals, which were more likely to be rated at a lower credit quality.
“We see the reemergence of the credit gap,” said Martin Arrick, another analyst at S&P. “Some of that has to do with size. Larger or more sophisticated providers are able to tap more tools, have more capital.”
The reports on financial medians also suggest that healthcare providers aren't out of the woods yet. Hospitals and health systems are getting an increasing percentage of their revenue from government payers, and both Medicare and Medicaid are likely to be constrained by more people coming onto their rosters in the coming years.
Questions also remain about how long providers can keep cutting expenses and what bad debt will look like as more commercial insurers transition to high-deductible plans.
Both Moody's and S&P found that not-for-profit providers have more days of cash on hand and a better cash-to-debt ratio than in recent years. But debt loads are likely to increase as providers fund pent-up capital needs, Soule said.
The average age of healthcare facilities has increased since 2010, as capital spending has slowed, Moody's found.
In the low-interest environment, providers have been issuing bonds even if they're not planning to use the proceeds right away.
“They're of the opinion that rates are going to go up relatively soon,” said Mark Pascaris, an analyst at Moody's, who added that the agency was busy in the first half of the year rating new issuances. “It's not necessarily to build a new patient tower—that's not being done anymore—but maybe an outpatient center.”