April 23, 2018; Wall Street Journal
Moody’s Investors Service recently surveyed 160 US nonprofit and public hospitals (about five percent of the total for the category). In a recently issued report, the firm says that median net operating cash flow margins for the responding hospitals dropped to 8.1 percent in 2017, twenty percent lower than the 2016 margin of 9.5 percent. The 8.1 percent margin for 2017 is the lowest median cash flow margin in a decade.
Operating cash flow margin “measures how efficiently a company converts sales into cash,” according to Investopedia. It differs from operating margin, which is defined as “how much profit a company makes on a dollar of sales, after paying for variable costs of production such as wages and raw materials, but before paying interest or tax.” The difference can be illustrated using Moody’s figures for 2016, when median cash flow margin was 9.5 percent and the median operating margin was 2.7 percent. Moody’s estimate of median operating margin data for 2017 have not yet been reported.
Both operating margin and operating cash flow margin are measures of profitability, but operating cash flow margin speaks more directly to the quality of revenue, which is a key concern for investor services like Moody’s.
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There are many factors contributing to the pressures on hospitals’ profitability, from labor shortages and increasing construction costs to changes in insurance patterns and the increasing use of locations other than hospitals to provide health care services. Moody’s says that gains associated with the passage of the ACA in 2010 “have essentially been realized.”
The future doesn’t look bright for hospital profitability. The repeal of the ACA’s individual mandate may cause more people to become uninsured, increasing pressure on hospitals to provide charity care. Medicaid expansion under the ACA has allowed more people to be insured, but Medicaid reimbursements typically don’t cover the actual costs of providing hospital care, so hospitals get paid, but not enough to cover rising costs.
The Wall Street Journal reports that “Hospitals in tight labor markets for nurses are offering bonuses to hire and retain nurses and relying on costly temporary nurse staffing agencies, said Lisa Goldstein, an analyst for Moody’s.” In a separate report, Moody’s predicts that the nurse shortage will affect hospital profitability for at least the next three to four years. The US Bureau of Labor Statistics predicts the nurse shortage will persist until at least 2025. The shortages will be most acute for hospitals in communities where the population is aging, where chronic disease management for conditions like diabetes and opioid addiction is needed, and where populations are growing rapidly.
Hospitals are continuing to seek merger and acquisition deals to build both size and market share in an effort to have more influence over pricing and profitability. It’s not uncommon to see reports of deals and potential deals involving tens of billions of dollars in assets across multiple states. Shrinking hospital profitability is a continuing sign that more deals are coming as hospital leaders cope with a rapidly shifting healthcare marketplace.—Michael Wyland