U.S. PUBLIC FINANCE
APRIL 23, 2014
Profitability and Revenue Growth Drop in US Not-for-Profit Hospital Preliminary Medians
MEDIAN REPORT
Operating Performance Pressure Continues as Predicted; Balance Sheet Measures Remain Stable
Summary
Table of Contents: SUMMARY MAJOR FINDINGS FROM FY 2013 PRELIMINARY MEDIANS FINAL FY 2013 MEDIANS TO BE PUBLISHED IN THE SUMMER 2014 APPENDIX 1: FREESTANDING HOSPITALS, SINGLE-STATE MEDIANS FISCAL YEARS 2011-2013 [1] APPENDIX 2: FREESTANDING HOSPITALS, SINGLE-STATE MEDIANS BY BROAD RATING CATEGORY, FY 2013 [1] MOODY’S RELATED RESEARCH
1 2 3 5
7 9
The fiscal year (FY) 2013 not-for-profit hospital preliminary medians point to continuing operating pressures in the industry. Both the operating margins and operating cash flow margins dropped as revenue growth continued to slow and expense growth continued to surpass revenue growth. Debt coverage metrics remained stable and balance sheet measures grew despite weaker operating performance. Important findings discussed in this report include: »
Median operating margins and operating cash flow margins declined, reflecting continued operating pressure on not-for-profit hospitals.
»
Median expense growth outpaced median revenue growth for a second year contributing to the drop in margins.
»
Unrestricted cash and investments grew as equity market returns were strong and capital spending levels decreased.
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Kendra M. Smith +1.212.553.4807 Managing Director - Public Finance
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The preliminary medians are based on FY 2013 audited financial statements of about 45% of Moody’s rated portfolio. These medians primarily reflect audit year ends of September 30, 2013 and prior; therefore, they do not incorporate the full impact of the Affordable Care Act (ACA) as coverage under the individual mandate did not go into effect until January 1, 2014. We present the preliminary medians in two formats: by year for three years, FY 2011-FY 2013 (Appendix 1), and by rating category for FY 2013 (Appendix 2).
U.S. PUBLIC FINANCE
Major Findings from FY 2013 Preliminary Medians »
Profitability margins continued to decline. The preliminary median operating margin and operating cash flow margin declined in FY 2013 for a second year in a row. The declines in both margins come after several years of growth or stability in profitability (see Exhibit 1). The drop is also seen across the Aa and A rating categories, while the Baa and below-Baa rating categories remain relatively flat compared to the prior year. The margin declines reflect the second straight year of the annual expense growth rate (4.6%) outpacing the annual revenue growth rate (4.1%) as well as a decline of the median annual revenue growth rate (see Exhibit 2). The decline in performance can be attributed to a number of factors including: 1) low rate increases from commercial payors and rate cuts from Medicare and Medicaid; 2) a payor mix shift to governmental payors from commercial payors; 3) an increase in high-deductible health plans with higher levels of patient responsibility contributing to increases in bad debt and lower healthcare demand; and 4) a shift to lower reimbursed outpatient visits and observation stays from inpatient admissions.
EXHIBIT 1
Profitability Margins Dropped in FY 2013 Preliminary Median Operating Margin
Preliminary Median Operating Cash Flow Margin
10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2010
2011
2012
2013
Source: Moody’s. Margins for each year are calculated with bad debt as an operating revenue deduction and based on audited financial statements for the same 203 organizations.
»
For research publications that reference Credit Ratings, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated Credit Rating Action information and rating history.
1
2
Median expense growth rate dropped, but remained greater than the median revenue growth rate for a second straight year. The median annual expense growth rate declined in FY 2013 compared to FY 2012, demonstrating a focus on cost containment among hospital operators and the shifting of care to a lower-cost and more efficient setting. The median annual revenue growth rate continued its decline, dropping to 4.1% from 4.6% (see Exhibit 2). It remained lower than the median expense growth rate for a second year in a row contributing to the drop in operating margins. The slowdown in expense growth comes in the midst of increasing costs for physician alignment and information technology, but demonstrates strategies and focus on cost control. We anticipated the decline in revenue growth in FY 2013. 1 For some hospitals, however, revenue growth was supported by nonrecurring funding sources, including information technology, meaningful use payments and payments under state provider fee programs.
2014 Outlook – US Not-for-Profit Hospitals
APRIL 23, 2014
MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS
U.S. PUBLIC FINANCE
EXHIBIT 2
Median Expense Growth Rate Exceeded Median Revenue Growth Rate For a Second Year in FY 2013 Median Annual Revenue Growth Rate
Median Annual Expense Growth Rate
10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Moody’s. The data prior to 2013 are from different sample sets. However the multiple years of data still accurately reflect the trend in the industry over this period. * 2013 is based on audited financial statements of 203 organizations.
»
Balance sheet ratios remained stable despite lower cash flow. The median unrestricted cash and investments increased in FY 2013 compared to FY 2012. This growth is consistent across all rating categories and comes as equity market returns were strong and capital spending levels declined. With the increase in cash, preliminary median days cash-on-hand increased, while median cash-to-direct debt remained relatively stable. The median cash-to-comprehensive debt improved as discount rates increased and market returns were strong, reducing defined benefit pension plan liabilities.
Final FY 2013 medians to be published in the summer 2014 We expect the final medians to show weaker operating performance than the preliminary medians due to the inclusion of more hospitals with calendar year-end audits after September 30, 2013 as well as hospitals concentrated in geographic regions with weaker economies. We anticipate the maintenance of general healthy balance sheet ratios in similar to the preliminary medians. The full medians report will reflect a larger sample size of our rated portfolio of hospitals and health systems. Our entire portfolio of not-for-profit acute care hospitals and single-state health systems consists of 448 rated organizations. We exclude certain specialty hospitals, such as children’s hospitals, cancer centers, and other non acute-care organizations from the medians. The preliminary medians differ from the full medians in some important respects. Most significantly, the preliminary medians consist mainly of audits ended June 30, 2013 and prior, with a smaller number of audits ended September 30 (see Exhibit 3). In contrast, we estimate just over 60% of the full year medians will consist of audits ended after June 30.
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APRIL 23, 2014
MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS
U.S. PUBLIC FINANCE
EXHIBIT 3
Distribution of Fiscal Year End Dates for 203 Free-Standing and Single-State Systems Included in FY 2013 Preliminary Medians Oct-1 to Dec-31 1%
July-1 to Sept-30 36%
Jun-30 & Prior 63%
Source: Moody’s.
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APRIL 23, 2014
MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS
U.S. PUBLIC FINANCE
Appendix 1: Freestanding Hospitals, Single-State Medians Fiscal Years 2011-2013 [1] NOTE: Bad debt is presented as an expense for FY 2011 and as a revenue deduction for FY 2012 and FY 2013. Published FY 2012 Medians are presented with bad debt as a revenue deduction. Preliminary Medians 2011
Preliminary Medians 2012
Preliminary Medians 2013
Published Medians 2012
433
421
442
421
23,215
24,027
23,380
24,262
4,797
5,736
6,263
5,218
27,873
28,908
29,858
28,908
107,396
104,463
107,292
109,330
1.60
1.60
1.63
1.59
4.7
4.6
4.7
4.6
Utilization [2] Maintained Beds Admissions Observation Stays Combined Admissions and Observation Stays Patient Days Medicare Case Mix Index Average Length of Stay (Days) Maintained Bed Occupancy (%)
[3]
66.6
63.7
64.7
63.5
81,367
83,344
85,812
81,703
298,927
319,886
345,870
291,039
10,440
10,323
10,389
10,516
Net Patient Revenues
507,885
479,083
495,718
488,218
Total Operating Revenue
528,222
515,276
542,128
527,589
7,662
7,267
7,932
8,104
26,919
27,978
30,689
29,819
504,684
500,082
531,149
506,597
Income from Operations
14,749
14,706
10,775
13,392
Operating Cash Flow
52,804
53,393
48,312
52,297
Excess of Revenue Over Expenses
30,959
31,124
26,395
29,811
Net Revenue Available for Debt Service
67,066
67,670
65,567
68,313
Debt Service
15,380
13,513
15,617
15,508
Additions to Property, Plant, & Equipment
34,756
39,354
36,688
38,973
Unrestricted Cash and Investments
259,360
254,938
285,748
257,819
Total Direct Debt
190,991
198,063
213,325
218,738
Total Comprehensive Debt
263,545
284,499
276,334
294,491
Net Fixed Assets
265,177
284,876
286,132
305,443
Unrestricted Net Assets
345,907
329,308
372,543
331,911
Monthly Liquidity
228,935
228,353
247,217
254,917
Annual Liquidity
241,286
253,814
238,032
264,781
Emergency Room Visits Outpatient Visits Outpatient Surgeries Financial Performance ($000)
Interest Expense Depreciation and Amortization Expense Total Operating Expenses
Balance Sheet ($000)
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APRIL 23, 2014
MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS
U.S. PUBLIC FINANCE
Preliminary Medians 2011
Preliminary Medians 2012
Preliminary Medians 2013
Published Medians 2012
Operating Margin
2.7%
2.5%
2.2%
2.5%
Excess Margin
5.4%
5.5%
5.2%
5.2%
Operating Cash Flow Margin
9.5%
9.8%
9.3%
9.5%
Cash on Hand (Days)
179.9
195.9
204.3
185.3
Cash-to-Direct Debt
132.1%
134.8%
137.4%
126.2%
95.1%
91.8%
100.7%
89.5%
Key Ratios [4]
Cash-to-Comprehensive Debt Maximum Annual Debt Service Coverage (x)
4.5
4.4
4.4
4.3
Annual Debt Service Coverage (x)
4.8
4.8
4.6
4.6
Debt-to-Cash Flow (x)
3.3
3.3
3.4
3.4
34.9%
37.2%
36.5%
37.6%
Annual Operating Revenue Growth Rate
5.3%
4.6%
4.1%
5.2%
Annual Operating Expense Growth Rate
4.8%
5.4%
4.6%
5.5%
3 Year Operating Revenue CAGR
5.7%
5.0%
4.9%
5.1%
3 Year Operating Expense CAGR
5.2%
5.0%
5.0%
5.1%
37.9%
38.3%
35.2%
38.9%
2.0
1.9
1.9
1.9
Debt-to-Total Operating Revenue
Debt-to-Capitalization Current Ratio (x) Cushion Ratio (x)
16.5
17.5
18.4
16.2
Return on Assets
4.8%
4.4%
4.2%
4.3%
Accounts Receivable (Days)
44.3
50.2
50.0
49.9
Average Payment Period (Days)
57.1
64.2
61.3
64.3
1.1
1.3
1.1
1.2
Capital Spending Ratio (x) Average Age of Plant (Years)
10.1
10.4
10.7
10.6
Monthly Liquidity to Demand Debt
346.2%
360.8%
405.1%
346.2%
Annual Liquidity to Demand Debt
368.4%
393.5%
428.0%
396.8%
34.5%
32.2%
31.1%
34.5%
383.4%
408.5%
448.3%
415.6%
98.2%
99.3%
98.8%
97.6%
Medicare
43.7%
43.9%
44.3%
44.1%
Medicaid
13.0%
13.0%
12.9%
13.1%
Commercial
34.0%
33.0%
32.1%
33.4%
7.7%
8.0%
7.6%
7.6%
Demand Debt as a % of Total Direct Debt Cash to Demand Debt Monthly Liquidity to Total Cash and Investments Patient Revenue Sources by Gross Revenue (%) [5]
Self Pay & Other
[1] Financial data are based on audited financial statements for 203 free-standing hospitals and single-state healthcare systems. [2] Utilization statistics are based on a smaller sample size where three years of consistent data are available. [3] Combined Admissions and Observation Stays is a separately calculated median and does not equal the sum of median Admissions and median Observation Stays. [4] Monthly and Annual Liquidity statistics are based on a smaller sample size where three years of consistent data are available. [5] Payor Mix columns do not sum to 100% because each entry is a separately calculated median.
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APRIL 23, 2014
MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS
U.S. PUBLIC FINANCE
Appendix 2: Freestanding Hospitals, Single-State Medians by Broad Rating Category, FY 2013 [1]
Sample Size
Utilization
All Ratings
Aa
A
Baa
Below Baa
203
35
103
53
12
442
1,002
428
307
303
23,380
53,621
21,689
15,564
13,548
6,263
15,699
6,162
4,262
2,664
29,858
69,320
29,714
19,716
18,778
107,292
274,601
101,033
66,237
67,375
1.63
1.73
1.62
1.59
1.54
4.7
5.1
4.6
4.4
5.0
[2]
Maintained Beds Admissions Observation Stays Combined Admissions and Observation Stays Patient Days Medicare Case Mix Index Average Length of Stay (Days) Maintained Bed Occupancy (%)
[3]
64.7
71.9
64.5
61.4
66.5
85,812
158,824
85,623
54,765
64,622
345,870
741,774
284,421
286,179
177,422
10,389
25,472
10,528
7,232
6,165
Net Patient Revenues
495,718
1,436,949
495,776
348,200
310,533
Total Operating Revenue
542,128
1,546,874
536,879
363,702
328,609
7,932
20,092
7,474
6,380
5,007
Depreciation and Amortization Expense
30,689
85,725
30,689
20,329
14,395
Total Operating Expenses
531,149
1,479,641
525,956
358,078
340,999
Emergency Room Visits Outpatient Visits Outpatient Surgeries Financial Performance ($000)
Interest Expense
Income from Operations
10,775
84,725
12,032
2,612
(3,289)
Operating Cash Flow
48,312
183,868
49,321
27,729
10,256
Excess of Revenue Over Expenses
26,395
161,863
29,329
8,995
4
Net Revenue Available for Debt Service
65,567
251,795
69,508
38,293
15,302
Debt Service
15,617
31,398
14,441
13,612
9,654
36,688
122,341
36,302
17,106
16,989
Unrestricted Cash and Investments
285,748
1,065,893
313,902
147,303
67,871
Total Direct Debt
213,325
550,008
189,201
153,142
113,984
Total Comprehensive Debt
276,334
767,555
250,819
211,531
211,651
Additions to Property, Plant, & Equipment Balance Sheet ($000)
Net Fixed Assets
286,132
866,203
276,593
179,454
138,834
Unrestricted Net Assets
372,543
1,275,879
429,376
183,643
79,325
Monthly Liquidity
247,217
977,321
282,002
124,530
75,596
Annual Liquidity
238,032
1,020,680
285,748
130,363
67,871
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APRIL 23, 2014
MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS
U.S. PUBLIC FINANCE
All Ratings
Aa
A
Baa
Below Baa
203
35
103
53
12
Operating Margin
2.2%
3.5%
2.7%
1.0%
-1.6%
Excess Margin
5.2%
7.2%
5.8%
3.4%
0.0%
Operating Cash Flow Margin
9.3%
10.0%
10.1%
8.5%
4.8%
Sample Size
Key Ratios [4]
Cash on Hand (Days)
204.3
252.0
217.3
147.7
84.4
Cash-to-Direct Debt
137.4%
194.8%
153.1%
103.9%
60.0%
Cash-to-Total Comprehensive Debt
100.7%
146.3%
110.4%
72.9%
37.3%
Maximum Annual Debt Service Coverage (x)
4.4
6.5
4.8
3.2
1.4
Annual Debt Service Coverage (x)
4.6
7.5
5.1
3.4
1.5
Debt-to-Cash Flow (x)
3.4
2.5
3.1
4.5
7.7
36.5%
31.9%
37.5%
37.0%
38.1%
Annual Operating Revenue Growth Rate
4.1%
6.7%
5.4%
2.2%
2.8%
Annual Operating Expense Growth Rate
4.6%
6.7%
5.9%
4.2%
3.7%
3 Year Operating Revenue CAGR
4.9%
6.1%
5.1%
4.0%
2.4%
Debt-to-Total-Revenue
3 Year Operating Expense CAGR
5.0%
6.2%
5.0%
4.4%
2.7%
35.2%
32.0%
33.0%
44.1%
56.5%
Current Ratio (x)
1.9
1.9
2.0
2.0
1.5
Cushion Ratio (x)
18.4
29.4
20.3
12.7
6.0
Return on Assets
4.2%
6.1%
4.6%
3.0%
0.0%
Accounts Receivable (Days)
50.0
45.3
51.8
48.0
48.3
Average Payment Period (Days)
61.3
67.8
58.9
61.0
65.1
1.1
1.5
1.1
1.0
1.0
10.7
9.1
10.5
11.2
12.0
Monthly Liquidity to Demand Debt
405.1%
424.4%
371.3%
312.1%
697.8%
Annual Liquidity to Demand Debt
428.0%
459.3%
380.0%
448.3%
697.8%
Debt-to-Capitalization
Capital Spending Ratio (x) Average Age of Plant (Years)
Demand Debt as a % of Total Direct Debt
31.1%
37.9%
32.2%
21.7%
12.9%
448.3%
495.0%
401.8%
448.3%
697.8%
98.8%
86.5%
98.1%
100.0%
100.0%
Medicare
44.3%
40.0%
46.1%
43.6%
49.1%
Medicaid
12.9%
14.1%
12.3%
13.4%
15.9%
Commercial
32.1%
35.7%
32.0%
32.2%
29.1%
7.6%
8.0%
7.8%
7.2%
6.0%
Cash to Demand Debt Monthly Liquidity to Total Cash and Investments Patient Revenue Sources by Gross Revenue (%)
[5]
Self Pay & Other
[1] Financial data are based on audited financial statements for 203 free-standing hospitals and single-state healthcare systems. [2] Utilization statistics are based on a smaller sample size where three years of consistent data are available. [3] Combined Admissions and Observation Stays is a separately calculated median and does not equal the sum of median Admissions and median Observation Stays. [4] Monthly and Annual Liquidity statistics are based on a smaller sample size where three years of consistent data are available. [5] Payor Mix columns do not sum to 100% because each entry is a separately calculated median.
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APRIL 23, 2014
MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS
U.S. PUBLIC FINANCE
Moody’s Related Research Outlook:
»
2014 Outlook – US Not-for-profit Hospitals, November 2013 (160569)
Median Report:
»
US Not-for-Profit Hospital 2012 Medians Show Balance Sheet Stability Despite Weaker Performance, August 2013 (157417)
Special Comments:
»
US Healthcare Reform: Three Risks Reduce Credit Positives for Not-for-Profit Hospitals, March 2014 (166602)
»
Two-Midnight Rule Will Reduce Revenue For Most Hospitals, March 2014 (165866)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.
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APRIL 23, 2014
MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS
U.S. PUBLIC FINANCE
Report Number: 167463
Author Jenn Ewing
Production Associate Prabhakaran Elumalai
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APRIL 23, 2014
MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS