Moody's on operating margins, technology and social determinants of health: 6 trends

As a credit rating agency covering healthcare, Moody's Investors Service gets an inside view of trends affecting nonprofit hospitals.

Becker's recently caught up with Lisa Goldstein, associate managing director for nonprofit healthcare at Moody's, who shared insights on these trends. Below, she addresses trends in nonprofit hospital medians, technology and social determinants of health.

Nonprofit healthcare medians

1. Moody's maintains a negative outlook on the nonprofit healthcare and hospital sector. The outlook is based on the credit rating agency's expectation that business pressures facing the sector, such as the shift to outpatient care, lower reimbursement rates, and increased labor costs due to shortages of clinicians, will continue.

2. The negative outlook is, in part, supported by the nonprofit healthcare medians published by Moody's in August. Median annual expense growth rate for nonprofit and public hospitals was 5.7 percent in fiscal year 2017 compared to 7.1 percent the year prior. At the same time, the annual revenue growth rate declined from 6.1 percent in 2016 to 4.6 percent in 2017. Additionally, median operating margins and cash flow margins fell to 1.6 percent and 8.1 percent, respectively, last year.

3. Ms. Goldstein said nonprofit hospitals are making less money, per the operating margin contraction, while absolute cash is "holding up" largely because of a favorable stock market and hospitals' investments in fixed income and equities. "Stock market returns have been good and support cash balances, so cash metrics, such as days cash on hand, are holding up," she said.

4. Moody's attributes operating margin compression largely to workforce pressures and the use of higher-cost temporary workers to fill shortages of nurses and physicians. Rising drug costs and supply costs are also factors. Additionally, Moody's said revenue pressures also contribute to margin compression as commercial insurer reimbursement rates are decreasing.

Technology

5. Healthcare organizations are investing in telemedicine, telehealth, EMRs and other digital technology. Ms. Goldstein views such investments as a necessary fixed cost to running a facility. However, she noted IT investments can be financially disruptive due to training costs, along with high hardware and software expenses. Overall, Moody's does expect some operating margin contraction at hospitals making IT investments.

Social determinants of health

6. Nonprofit hospitals are increasingly focused on social determinants of health, such as socioeconomic status, and are working to address homelessness, food insecurity and other factors that contribute to a person's health. Ms. Goldstein gave the example of one system Moody's analyzes, Salt Lake City-based Intermountain Healthcare, which is setting up a food bank in an area they serve. "If they can get at some of the core determinants or drivers to chronic illness then it will get at the heart of some of the social ills that lead to expensive care," she said. "A focus on social determinants of health is nothing new, but I think some systems are taking this on because they have the ability to do so."

 

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