Moody’s Investors Service released a report of FY 2016 financial statements this week that found annual expense growth rate outpaced annual revenue growth rate for nonprofit and public healthcare organizations.
Moody’s said annual expenses grew 7.2%, which outpaced 6% annual revenue growth. That led to absolute operating cash flow contraction of -4.5%.
Despite those numbers, Moody’s said the sector has a “stable outlook.”
Moody’s reviewed FY 2016 financial statements for 323 freestanding hospitals, single-state health systems and multi-state healthcare systems, which represent 81% of all rated healthcare entities.
The firm said rising pension contributions, soaring labor costs and high pharmaceutical costs were the reasons for increased expenses. Widening pension funding gaps are stressing balance sheets and income statements. Pension plan obligations have increased because of new mortality table adoption and discount rate declines. This has led to “strained key financial metrics,” said Moody’s.
"Higher expenses coupled with positive, albeit slower, revenue growth, contributed to lower profitability, tempered liquidity growth, and moderation of nearly all financial metrics," said Beth Wexler, a Moody's vice president. "Tighter margins will weigh on the sector going forward."
Unrestricted cash and investments increased by 5.7% to $435.8 million, but the growth rate has declined each year since 2013, which is when the sector showed 11.2% growth.
Outpatient visits increased by 4.5% and outpatient surgeries by 3.5%, which were better than inpatient growth rates. This is similar to what other hospitals are seeing and it's why hospitals are investing more in their outpatient services. Some hospitals are even looking at former retail spaces as locations to open new outpatient facilities.
"While total admissions increased, the growth rate slowed to 2.4% from 3.1% as the uninsured population stabilized," Wexler said.
Moody’s report isn’t surprising. All hospitals are trying to find ways to stay profitable during an unpredictable time of fewer patient admissions, sagging reimbursements and an unpredictable political environment.
Many healthcare officials hoped the Affordable Care Act (ACA) would help hospitals. They assumed more insured Americans would reduce uncompensated care and provide a more stable environment. Uncompensated care has decreased, especially in the Medicaid expansion states, but that hasn’t resolved all hospitals' financial woes.
Hospitals are also dealing with the general uncertainty about the industry. Congress has so fair failed to pass any healthcare overhaul bills, but the debate could continue when lawmakers return from recess next month.