Fitch predicts profitability obstacles for US hospitals in 2016: 5 things to know

Fitch Ratings expects margins for the largest U.S. for-profit hospital companies to be under pressure in 2016, due to some profitability challenges from last year as well as new challenges in the coming year.

Here are five things to know about Fitch's projections, as presented by Reuters.

1. U.S. for-profit hospital companies reported an average 2 percent growth in patient volumes in the third quarter of 2015, but this did not translate into growth in operating margins. The lack of positive impact on operating margins marks a reversal in year-over-year improved operating margins in the last few quarters, according to the report. In the third quarter of 2015, the largest U.S. for-profit hospital companies reported an average operating EBITDA margin up just 16 basis points over the same period last year and many reported significant decline in same hospital margins, according to the report.

2. Several factors hindered profitability in 2015, though Fitch expects many to be short-lived. These factors include higher labor and supply expenses, weak growth in pricing and higher levels of uncompensated care. Acute care hospitals felt the benefits of the Affordable Care Act in early 2015, according to Fitch, but it is still too early to determine if the increase in uncompensated care in late 2015 was due to a tapering of the law's benefits.

3. Fitch projected a few of these challenges to carry over in 2016, and a few new headwinds to add to financial pressures. The commercial viability of the public health insurance exchanges and slow progress in Medicaid expansion will stall the benefits of the ACA in 2016, according to Fitch. New potential challenges include presidential election-cycle politicking and ACA news flow, which could both impact equity prices and capital deployment priorities for hospital companies in the coming year.

4. Recent acquisitions provide an opportunity for hospital companies to pay down debt. Some companies continue to have high leverage from recent acquisitions, according to Fitch. "Good operating cash flow generation and proceeds from asset sales will provide an opportunity to pay down debt over the next several quarters," the report reads. Nonetheless, Fitch predicts cash will most likely be funneled back into acquisitions and share repurchases next year.

5. Where companies invest will determine their upward rating momentum in 2016. According to Fitch, most hospital companies have some buffer room under negative rating triggers, but these capital deployment decisions — payment of down debt versus acquisitions and share repurchases — will likely determine upward ratings.


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