Nonprofit hospital finances not expected to return to pre-recession levels just yet

A desire to improve revenue may further accelerate efforts to align with physicians.

By Victoria Stagg Elliott — Posted May 22, 2012

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Revenue growth at nonprofit hospitals remains tepid and most likely will not improve anytime soon.

Median revenue growth at nonprofit hospitals and health systems increased slightly to 5.3% in fiscal 2011 from 4.5% in fiscal 2010, although the figure was still down from the years before the 2007-09 recession. This is according to an annual report published April 26 by Moody’s Investors Service that analyzed preliminary data from 213 organizations.

“There’s some improvement, but these numbers are still pretty low compared to historical averages,” said Sarah Vennekotter, assistant vice president at Moody’s and one of the report’s authors.

A final analysis will be issued this summer, although the results probably will be similar. Researchers expect these trends to continue long term.

Before the recession, revenue grew at a median rate of 7% or more per year. Researchers say the economic downturn and slow recovery have kept inpatient admissions down. Nonprofit hospitals and health systems had a median of 22,041 admissions in fiscal 2011 and 22,133 in fiscal 2010. A higher percentage of patients are covered by government programs, which tend to have lower rates than commercial payers. About 44% of patients were covered by Medicare in fiscal 2011, but only 42.5% had Medicare coverage in fiscal 2010. The proportion of patients on Medicaid went from 12.2% in fiscal 2010 to 12.8% in fiscal 2011.

However, commercial payers have been holding down reimbursement as well. The trends reflect what is happening with physician payment, analysts said.

“Payers have been putting pressure on everybody,” said Michael J. Parshall, a medical consultant based in Schwenksville, Pa. “There’s not anybody who escapes anymore.”

Revenue trends were somewhat countered by hospitals keeping a tight rein on costs. Expenses grew by a median of 4.9% in fiscal 2011 and 4.5% in fiscal 2010. In addition, capital projects were deferred. The median age of the buildings that house nonprofit hospitals and health systems went from 10 years in fiscal 2010 to 10.3 years in fiscal 2011.

The authors expect hospital revenue trends to continue, because pay rates from private and public insurance are not expected to go up much in the near future. The shift from fee-for-service to bundled payments and accountable care organizations may further erode operating margins.

Parshall said these trends are unlikely to dampen the appetite for acquiring doctors’ offices, employing physicians and building joint ventures.

“Most hospitals realize, for the most part, that they have to be closely tied to their medical staff, and they are trying to get closer,” he said.

People who advise medical practices say physicians should take a close a look at hospital finances — or hire someone who can carry out a thorough analysis — before signing on the dotted line for any alignment agreement. The median operating margin for all institutions analyzed in Moody’s report was 2.6%. In fiscal 2010, it was 2.4%. For the 34 systems rated “Aa” by Moody’s, an indicator of good financial health, the margin was 3.9% in 2011. The 20 facilities rated below “Baa,” an indicator of poor fiscal stability, had a median operating margin of -1.1% for fiscal 2011.

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