After several years of hospital expenses outpacing revenue, the trend has finally shown signs of reversing course. The median growth rate in operating revenues topped expenses for the first time in three years, according to the latest Moody’s report.
Despite being low compared to the peak in 2015, the median revenue growth rate for hospitals and health systems increased to 5.5% last year, while expense growth dipped slightly. The ratios of margin and debt coverage showed signs of stability, driven largely by management teams’ focus on expense reductions and revenue cycle improvements.
The bad news is that enterprise growth strategies (like mergers and acquisitions) and a weaker equity market led to stangnating cash balances in 2018 and a decline in days cash on hand.
WHAT’S THE IMPACT
Median 2018 revenue and expense growth rates were nearly identical — 5.5 and 5.4%, respectively. Revenue growth remained a hurdle due to hospitals’ ongoing reimbursement challenges, as well as meager growth in inpatient volume relative to outpatient visits. Reimbursement difficulties were only exacerbated by a decline in commercial revenue as a percent of gross revenue. And there was more reliance on Medicare, which is less lucrative.
Margins largely held steady, but they’re still well below past levels. The 1.8% median operating margin was a small improvement, and the decline in operating cash flow margin slowed down after two straight years of steep drops, landing at 7.9%.
Enterprise growth and weak equity market returns lead to stagnant absolute and relative liquidity. Median days cash on hand declined to 200.9 days, down from 206.6 days in 2017. To preserve liquidity, hospitals reduced capital spending — median additions to property, plant and equipment declined to $ 63.7 million from $ 65.7 million.
Leverage metrics remained constant. Stable debt metrics were tied to the improvement in net revenues available for debt service and the negative median rate of change in debt outstanding — which illustrated the cautionary approach management took to adding leverage given continued revenue and expense hurdles.
Meanwhile, the median growth rate in inpatient admissions continues to trail outpatient volume. The median growth rate in total admissions (inpatient admissions plus observation stays) dropped to 1.1% in 2018, a decline for the third year in a row and well below the 2.9% increase in outpatient visits.
THE LARGER TREND
A Kaufman Hall profitability analysis released earlier this year found that while 2018 got off to a bad start, hospital volumes and profitability rebounded here and there — though not nearly enough to make it a banner year.
The summer months tend to be stronger on the profitability front, but there is an overall trend of declining profitability.
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