When it comes to nonprofit hospitals, the financial outlook for the sector has sounded pretty dismal for the past several years.
They face ongoing pressures of soft revenue growth, weak inpatient volumes and single-digit reimbursement increases, pushing margins down as expenses outstrip revenue—a trend that Moody’s called an “unsustainable path” earlier this year.
This week, new reports from the two top rating agencies—Moody’s Investors Service and Fitch Ratings—offer an additionally gloomy outlook for 2019.
But while these hospitals face a tough road ahead, the news is not as bad as it might seem, said Kevin Holloran, senior director at Fitch who just gave the sector a “negative” outlook.
“We’re putting warning flags up, but no ones calling for disaster,” Holloran said.
He acknowledged operating margins have been on the decline while hospitals deal with nontraditional competition, new technology changing the way medicine is practiced and the continued shift from inpatient to outpatient care. “But pretty much, however, you want to measure it, balance sheet strength is pretty much at an all-time high,” he said.
He pointed specifically to hospitals’ days’ worth of cash on hand, as well as their cash-to-debt and debt-to-capitalization ratios as measures in particular that had been improving over time, leading to stable ratings for the sector.
That’s because when times were good and the markets were rebounding several years ago, hospitals were building up their reserves and shrinking their capital expenditures.
“Until a significant market dislocation, we expect those balance sheets to remain kind of robust which is going to balance out the negatives from operations,” he said.
When it comes to some of the pressures facing nonprofit hospitals, Holloran pointed to some of the usual suspects such as salary and benefits for employees, skyrocketing specialty drug costs for products such as Harvoni or Keytruda, and investments required for the shift from volume to value-based care.