Moody's: Margin contraction puts nonprofit hospitals on unsustainable path

Annual expense growth for nonprofit and public hospitals outpaced annual revenue growth in fiscal year 2017, according to Moody's Investors Service.

The median annual expense growth rate was 5.7 percent in fiscal 2017, down from 7.1 percent in fiscal 2016. However, the annual revenue growth rate declined faster, falling from 6.1 percent in fiscal 2016 to 4.6 percent in fiscal 2017. "This is the second consecutive year expenses have topped revenues and this will remain the largest strain on NFP hospital profitability through 2019," Moody's said.

The lower revenue growth was attributable to several factors, including the shift to outpatient care, increased ambulatory competition and lower reimbursement rates. The lower expense rate was largely due to better control of supply and labor costs, according to Moody's.

Moody's expects nonprofit hospital margins will continue to be suppressed through 2018 after median operating margins and cash flow margins fell to all-time lows of 1.6 percent and 8.1 percent, respectively, in fiscal 2017.

"Reversing sluggish volume trends and growing profitable service lines will be critical to improving the sector's financial trajectory over the near-term as most hospitals continue to operate in a fee-for-service environment," said Rita Sverdlik, a Moody's analyst.

The medians are based on an analysis of audited fiscal year 2017 financial statements for 303 freestanding hospitals, single-state health systems and multistate healthcare systems, representing 78 percent of all Moody's-rated healthcare entities.  

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