Not-for-profit hospitals see revenue growth tumble

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U.S. not-for-profit hospitals’ revenue growth hit an all-time low of 3.9 percent in 2013, Moody’s Investor Services calculated, with little relief in sight for 2014.

Moody’s released on Aug. 27 its median report for not-for-profit hospitals. It based its analysis on audited financial statements for 383 free-standing hospitals, single-state health systems and multistate healthcare systems, which after exclusions represented 88 percent of rated organizations.

The report detailed a challenging year for not-for-profits. Operating revenue growth slipped from 5.1 percent in 2012 to 3.9 percent in 2013, which is a steep drop from the roughly 9 percent rate enjoyed in 2002. Analysts attributed the decline to lower rates from commercial payers, reductions in Medicare reimbursement, sequestration, higher deductibles and greater use of less costly outpatient services and observation stays.

The expense growth rate slowed in 2013 but still exceeded revenue growth. It totaled 4.3 percent, down from 5.5 percent in 2012. Moody’s credited the dip in expense growth to cost-containment efforts and a shift to more efficient outpatient settings. “After several years of expense cutting to keep pace with the slowing revenue growth, we expect the next level of cost reductions to involve changing processes and care delivery, the benefits of which may be slowly realized.”

With the expense growth outpacing revenue growth, not-for-profit hospitals witnessed further declines in their profitability margins. Operating cash flow margins sank to an all-time low of 9 percent while operating margins fell to 2 percent.

One in four not-for-profits posted operating losses and half had declines in absolute operating income.

In another sign of a migration to less expensive outpatient care, the inpatient admissions growth rate came in at negative 1.3 percent for 2013. The analysts projected that trend will continue as hospitals engage in more pay-for-performance reimbursement models and patients face higher cost burdens in 2014.

Medicare remained the dominant payer, reaching a high of 44 percent in 2013. Commercial payers, on the other hand, declined to an all-time low of 32.4 percent, which was a factor in the lackluster revenue growth.

The two-midnight rule and other restrictions in inpatient admissions likely will continue to dampen revenue growth. Hospitals also will face competition from retail centers and drugstore clinics, and higher out-of-pocket expenses may compel some patients to skip elective procedures.

On a positive note, not-for-profit hospitals had a good year for unrestricted cash and investments, with a growth rate of 11 percent in 2013. Analysts credited a combination of good equity market returns and a drop in capital spending. This liquidity may help cushion hospitals during 2014.