Revenue decline moving faster than Not-for-profit hospitals’ cost reductions
U.S. nonprofit hospitals’ median annual revenue growth declined faster than expense growth rate fell in fiscal year 2017, according to financial data compiled by Moody’s Investors Service.
According to the American Hospital Association (AHA), 58% of the U.S. Community Hospitals are Nongovernment Not-for-Profit Community Hospitals. Not-for-profit hospitals’ cost reductions are not keeping up with revenue decline. The lower revenue growth was attributed to shift of services to outpatient care, increased ambulatory care centers competition, and lower reimbursement rates.
Moody’s analysis shades alarming facts about revenue trends in the past couple of years; the growth in expense reduction is slower than revenue decline. The median annual expense growth rate fell from 7.1% in 2016 to 5.7% in 2017. However, the annual review growth rate declined faster falling from 6.1% to 4.6%, despite increased merger and acquisition activity, according to Moody’s. “This is the second consecutive year expenses have topped revenues and this will remain the largest strain on NFP hospital profitability through 2019,” Moody’s stated.
Hospitals have been closing at a rate of about 30 a year, according to the AHA. Not-for-profit hospitals have had a reduction in debt over the past 5 year while their debt service coverage ratios have softened. Moody’s analyst Rita Sverdlik commented that funding capital needs through debt financing could exacerbate the trend.
Healthcare systems are seeing increased competition in competing physician-led ambulatory surgery care service. Median 1% growth in inpatient admissions in 2017 marks the lowest rate of growth in the last three years. Similarly, the reduced median rate of growth in outpatient visits to 2.2%—down for the first time in five years—and the decline in the median growth rate of outpatient surgeries to 0.8% speaks to the increasing supply of competing sites providing these more lucrative services, Moody’s analysts said.
Median outpatient visits grew by 2.2% while inpatient admissions only rose by 1.2% as patients opt for less costly outpatient care. Medicare’s share of revenue increased from 0.6% to 1.6% from 2016 to 2017 and commercial payor growth was negative 1.9%. Moody’s said this trend would continue as the population ages.
As an active contributor in the healthcare industry, I see the need for diversification; growing service lines that are most profitable is essential for increasing growth at a faster pace. As Rita Sverdlik stated, “Reversing sluggish volume trends and growing profitable service lines will be critical to improving the sector’s financial trajectory over the near-term as most hospitals continue to operate in a fee-for-service environment”.