This is the first of three newsletters based on Moody’s Investors Service medians reports for FY 2015. Next week we will cover consolidation/size and wide statistical variances, followed by revenue growth for the largest and smallest hospitals.
“Not-for-profit and public healthcare revenue growth rebounded to levels not seen since fiscal year (FY) 2008 and exceeded expense growth for the second consecutive year,” according to Moody’s Investors Service FY 2015 medians report. Steady revenue growth and strong financial margins support Moody’s stable outlook for the sector. (Medians – Growing Revenue and Demand Support Strong Margins, Contraction Ahead, Moody’s Investors Service Sector In-Depth, September 8, 2016)
Moody’s analysts noted that despite the pace of improvements in certain key trends, the pace “will not likely be sustained,” citing its expectations of moderating fundamental business conditions across the not-for-profit healthcare sector. One of the predominant issues continues to be the shift from traditional fee-for-service to value-based reimbursement, which places downward pressure on financial performance and financial metrics.
The key findings in the report on medians are noted below.
Multi-year trend of strong annual and three-year revenue compounded annual growth rates (CAGR) underscores the sector’s stability for fiscal year 2016.
- Stronger annual revenue growth reflected benefits from consolidation in the sector, gains in insurance coverage and favorable utilization trends.
- Growth will slow because year-over-year declines in bad debt have slowed, health insurance exchanges are showing signs of stress, expenses are rising with higher drug costs and weaker volume trends reported in the first half of FY 2016.
Building on prior years’ stable performance, the growth rates of absolute operating income and operating cash flow, as well as median profitability margins, surpassed historic levels. Median 3.4 percent operating margin and 10.3 percent operating cash flow margin were at a multi-year high for the sector.
- Growth rates were not as robust as seen in the FY 2015 preliminary medians reflecting lower volumes in the latter part of FY 2015.
- Careful alignment of revenue and expense growth, greater insurance coverage and good volume growth translated into a notable uptick in operating and operating cash-flow margins.
- Margins should moderate given tightening reimbursement, increasing pension expense, exhausted cost-cutting measures and expectations of slowed revenue growth.
Improvement in absolute liquidity was modest and days cash on hand flat despite an upward trend in margins. Positive operating trends and moderated capital spending balanced by a weakened equity market returns contributed to tempered liquidity growth.
- With a slower growth rate in absolute liquidity of 7.1 percent as compared to double-digit levels the last two years, days cash on hand showed no growth and remained relatively level at 211.8 days.
- Liquidity measures tapered despite strong revenue and operating metrics and a modest level of capital spending, as evidenced by capital spending ratio of 1.1 times. This dynamic reflects the overall trend of weak second-half investment market performance in 2015.
- Strengthening of absolute and relative balance sheet measures will narrow again in FY 2016 as growth slows in revenue, demand and profitability.
All utilization measures showed improved growth rates as uninsured population declined for second year. Demand trends reflected a more highly insured population and consolidation of the sector.
- Combined inpatient admissions and observation stays grew 2.8 percent in the FY 2015 medians after a trend of low and variable growth over the last several years. The annual growth rate for inpatient admissions was a positive 2.7 percent for the first time since FY 2011.
- Consolidation in the sector, benefits from gains in insurance coverage and continued aging of the population drove stronger growth rates.
- Demand trends will level off with the lighter flu season seen in early FY 2016, insurance exchange products exhibiting stress and rising deductibles and co-pays that may thwart demand for electives.
Hospitals shied away from heavy investment in traditional bricks and mortar given challenges that face the sector while demand for information technology increased. Though capital spending remained above depreciation levels, it has moderated since FY 2012 and the average age of plant has risen.
- After moderating from a high point in FY 2012, the capital spending ratio rose very modestly in FY 2015 but continues to exceed annual depreciation levels.
- The average age of plant has risen in each of the last five years. However, hospitals report spending as much as one-third of their annual capital budgets on information technology, which is often recognized as an operating expense and therefore not captured in traditional capital spending measures.
- Traditional capital investment will remain restrained, resulting in an increased median age of plant, as hospitals will be deliberate and cautious in funding infrastructure.
(iProtean, now part of Veralon extends its appreciation to Moody’s Investors Service for giving us permission to quote liberally from its reports.)
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