Nonprofit hospitals' profits rise amid declining revenue growth

A report finds cost-cutting helped the bottom line, but that the shaky economy will continue to stifle growth.

By Victoria Stagg Elliott — Posted Sept. 22, 2010

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Nonprofit health care institutions improved their fiscal shape in 2009, according to an annual report issued by Moody's Investors Service.

Analysts at the credit ratings service, however, predict that hospital systems won't be able to continue to improve their margins because they are still seeing revenues decline. Their improved margins for 2009 were a result of cost-cutting.

"If you don't have revenue growth, it is hard to grow the organization," said Kay Sifferman, vice president and senior credit officer at Moody's in Dallas.

The Aug. 25 report, "Not-for-Profit Healthcare Medians for Fiscal Year 2009 Show Improvement Across all Major Ratios and all Ratings Categories," included information gathered from 401 nonprofit hospitals. The report said median operating margins improved from 1.8% in 2008 to 2.3% in 2009.

Larger entities fared better than smaller ones. The operating margins of the 50 largest institutions in the survey grew from 2.8% in 2008 to 3.5% in 2009. The operating margins of the 50 smallest hospitals grew from 0.4% in 2008 to 0.6% in 2009.

Hospitals canceled or delayed capital investments, and reduced the average time bills spent in accounts receivable from 48.4 days to 45.2, according to the Moody's report. (See correction)

Some hospitals laid off staff or stopped hiring. Raises were muted, if given at all, with employee compensation increasing less than previous years. In 2008, expenses related to staff salaries and benefits grew 8.2%, compared with 5.6% in 2009.

"If you freeze salaries, eventually you are going to have to give raises again," Sifferman said. "You can only control expenses for so long."

The authors say revenue must go up for operating margins to continue to recover, but several trends suggest that this will be difficult. The larger economy is still on unsteady footing, and medical care continues to move from the inpatient to outpatient setting. Medicare and Medicaid reimbursements are declining, and more people are covered by these programs. Most surveys show that hospital visits are going down, particularly for cash-paying elective procedures.

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