NFP Hospitals' Revenue Growth at 'All-Time Low'

Not-for-profit hospitals are feeling financially pinched as healthcare reform efforts seek to simultaneously increase healthcare accessibility, cut costs, and improve quality.

Marking a second consecutive year of weak financial performance at not-for-profit hospitals, 2013 expenses outpaced revenue growth in the sector and similar results are expected this year, according to Moody's Investors Service.

In a median report released this week, Moody's says "operating revenue growth dropped to an all-time low of 3.9 percent and was outpaced by expense growth for a second consecutive year, an unsustainable trend." NFP hospitals posted 5.1 percent revenue growth in 2012.

Moody's pegged the 2013 growth rate of NFP hospital expenses at 4.3 percent. Expenses grew at 5.5 percent in 2012.

Jennifer Ewing, a Moody's analyst who co-authored the report, says lower reimbursement for services coupled with a shift to outpatient care from inpatient care is bringing financial pressure to bear on NFP hospitals.

She cites several factors dragging on revenue growth: lower reimbursement from commercial payers as they drive harder pricing deals on insurance exchanges as well as shift risk to providers and patients; tighter Medicare reimbursement; "built-in" statutory cutbacks for government programs that help fund hospitals such as reductions in federal Disproportionate Share Hospital payments; and Medicare's proposed "two-midnight rule" for determining outpatient vs. inpatient status accelerating growth of outpatient services at the expense of relatively more profitable inpatient care.

Ewing says "lower-cost providers" such as pharmacy clinics and urgent care centers are also draining revenue from NFP hospitals. They are acting as "new competitor[s]," she said of the new entrants and new business models proliferating in the delivery of healthcare.

Weak Cash Flow
Cash flow is also a weak spot in the NFP hospital median report, which states, "The operating cash flow margin reached an all-time low of 9%."

Despite that grim figure, Ewing sees glimmers of hope for hospital executives. "This is the first year expense growth slowed, [and] it still outpaced revenue."

The report also noted growth in NFP hospital "absolute and relative liquidity measures." Ewing said "we believe the reasons for the increases in liquidity are the strong equity market and wiser capital spending."

"As the stock markets do well, the hospitals do well," added Lisa Goldstein, associate managing director at Moody's and a co-author of the report. "The investment returns can build up your cash."

Goldstein says the imbalance between expenses and revenue growth at NFP hospitals will likely persist over at least the short term. "We expect these 2013 trends to continue for 2014," she said.

'In a Tough Spot'

"The hospital community has been under pressure for some time," said Peter Angood, MD, CEO of the American College of Physician Executives. The ongoing financial squeeze has prompted hospital officials reconsider how they deliver care to patients across the board.

Two of the prime efforts to expand healthcare accessibility—the new public health insurance exchanges and Medicaid expansion—are likely to be a net negative for many hospitals, Angood said.

"That's going to increase pressure on hospitals to manage that new population of patients," he said, noting traditionally low Medicaid reimbursement rates and the bill collection burden linked to the high level of patient cost-sharing on the exchanges.

Katherine Hempstead, team leader and senior program officer at the Princeton, NJ-based Robert Wood Johnson Foundation, said financing an NFP hospital is a lot like keeping an airline afloat, with both industries "highly regulated, with a high cost of entry and high cost structure."

"They really are in a tough spot," she said of NFP hospitals. "The good news is they are becoming more efficient. … Hospitals are becoming much more mindful of what they do that is wasteful and what they do that is efficient."

Hempstead pointed out that a key finding of the Moody's report is the shift away from inpatient care in dollars and cents. "If I were a hospital, I would be looking for other places in the delivery chain where there's growth," she said. "Hospitals are not going to go away, but there are so many forces that are pulling away from inpatient care."

In addition to focusing on efficiency gains and opening new lines of service, NFP hospitals can also hold the line financially through consolidation efforts that build market power and by establishing high quality standards, Hempstead said.

"Hospitals need to demonstrate superior quality," she said. "It's possible we have excess capacity. It's possible we'll see hospital closings. But there's no substitute for hospitals. I don't think [the financial situation] is an existential threat for the whole sector."