Holding Steady – Operating Margins Same, With Overall Increase
www.modernhealthcare.com By Ashok Selvam August 8, 2011
Despite the challenge of softer patient volume, not-for-profit hospitals and health systems maintained their operating margins and improved their overall margins in fiscal 2010, according to median financial figures released last week by Standard & Poor’s. Median net margins for standalone hospitals and healthcare systems rose to 4% last year from 2.4%. That bodes well for the short term, but S&P officials expect revenue growth to continue to slow.
“Providers are going to have a harder and harder time offsetting what is an increasingly hostile environment,” said Martin Arrick, a managing director in S&P’s Public Finance Ratings Group.
Operational margins remained at 2.3%, almost identical to fiscal 2009. That trend will also continue for the next couple of years, Arrick added. “Margins will be squeezed, and I think providers will work very hard to maintain the margins they have and the rate of decline for the best systems will either be not at all or very slow,” he said. “But for those having a harder time, it will accelerate.”
The earnings before interest, depreciation and amortization numbers also stood out at every level. While not reaching the heights of fiscal 2000, the EBIDA figures saw a sharp rise from last year, S&P analyst Jessica Goldman pointed out. S&P credited better nonoperating income and stable operating earnings for the increase. That repeats a pattern a Modern Healthcare analysis showed last year, that hospitals rely on investment and other nonpatient income to supplement modest operating margins.
“We think a lot of people are holding on to the improvements they made in 2009,” Goldman said.
S&P released two healthcare rating reports last week. One focused on 143 health systems comprising at least three hospitals and featuring somewhat diversified operations. The other targeted 561 health systems and standalone hospitals.
Struggling hospitals could look for a stronger, more stable parent system to avoid operational reductions. That decision comes with the familiar resistance of entrusting control of a facility to a party that may not live in the same community, Arrick said. But it provides an alternative, he said, because “How long can you keep cutting expenditures?”
Meanwhile, hospitals continued to defer big projects. Capital spending for standalone hospitals and healthcare systems decreased by almost 25% last year.
Brick-and-mortar projects may simply be deferred, as officials study how healthcare delivery will change in the future, but there’s also the chance hospitals are pocketing that money, Arrick said. Waiting on new construction for two or three years won’t lead to anything detrimental. Instead of new construction, hospitals may choose to invest in better equipment in existing facilities, he said.
Even with the operational challenge of low patient volume, multihospital systems are improving their balance sheets—for example, days of cash on hand rose to 175.2 days in 2010 from 154 in 2009, according to S&P.
Medicare inpatient PPS rates released last week by HHS offered a glimmer of hope, Arrick said. HHS will increase total Medicare operating payments to acute hospitals by $1.1 billion, or 1.1% for fiscal 2012 (See related story, above). Most forecasted no increase. While not huge, the bump could provide some facilities with an unexpected source of money. “In a way, that’s good news,” he said.
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