Fitch: Nonprofit hospitals' profitability may be strained in FY 2016

Median operating profitability metrics for nonprofit hospitals and health systems improved across all categories in fiscal year 2015, Fitch said in a special report.

This improvement was driven by continued focus on improving operating cost efficiencies, expanded coverage from the Affordable Care Act and greater focus on revenue cycle improvement and collections.

Specifically, the median operating margin and operating EBITDA margin improved to 3.5 percent and 10.3 percent, respectively, in FY 2015 from 3 percent and 9.7 percent in FY 2014, according to Fitch. Furthermore, the rating agency said, median operating profitability margins (that is, operating and operating EBITDA) improved across all rating categories.

However, Fitch said on the Fitch Wire credit market commentary page that hospital median liquidity metrics were mixed as the impact of strong operating cash flow and reined-in capital spending were offset by low investment returns.

Fitch said it expects operating performance (and profitability) to be more volatile in FY 2016 and beyond, reflecting growth in the Medicare population, CMS' further implementation of value-based reimbursement models (for example, bundled payments) and Medicaid patients accessing more healthcare services.

"We expect that deferred pressures from healthcare reform will emerge. Operating performance is more likely to be challenged in FY 2016 and beyond due to labor and wage pressures for clinical staff, as well as the increasing need to employ and/or align clinicians to meet the requirements of population health management," the rating agency wrote.

"Over the next 36 months we believe the movement to risk-based payer contracts from managed care contracting is likely to gain momentum, mainly because their most common proponents, larger and more integrated health systems, have emerged in several major metropolitan areas. This transition will likely heighten existing pressure on operating margins. The likelihood of margin compression will be greater for hospitals with less experience in managing risk and those with smaller revenues bases and mostly fixed expenses."

 

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