3 things to know about Moody’s hospital report

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Moody’s Investor Service released its latest review of financial performance for the 323 not-for-profit hospitals it rates on Aug. 21, showing tighter profit margins and a milestone being reached for outpatient revenue in 2016 while retaining a stable outlook for the sector.

“Higher expenses coupled with positive, albeit slower, revenue growth, contributed to lower profitability, tempered liquidity growth and moderation of nearly all financial metrics,” said Beth Wexler, a Moody's vice president. “Tighter margins will weigh on the sector going forward.”

Here are three key takeaways from the report:

1. Outpatient revenue surpassed inpatient revenue

For the first time among hospitals rated by Moody’s, outpatient revenue made up a greater share of net patient revenue at hospitals than inpatient services—50.5 percent of net patient revenue came from outpatients, up from an equal 50-50 share the year before and 47.9 percent in 2013. It matches other industry predictions about short-term revenue growth being found in outpatient service lines, though growth in outpatient surgeries was sluggish, which the report said could be an indication of increased competition.

2. Expenses grew faster than revenue

Expense growth was 7.2 percent in 2016, which Moody’s said “widely outpaced” annual revenue growth of 6 percent. That led to absolute cash flow contracting by 4.5 percent. The slower revenue growth was driven by “rising pension contributions, soaring labor costs and higher pharmaceutical costs,” according to Moody’s. It had previously reported on other issues that can limit cash flow, such as installing new electronic health record systems.

3. Profit margins tightened

The sector’s average excess margin in 2016 was 5.6 percent. This was down from 6.1 percent in 2015, though roughly in the same range as recent reports. The outlook looks a tad bleaker, however, as Moody’s said, “widening pension funding gaps stressed balance sheet and income statements as increased defined benefit pension plan obligations, from the adoption of new mortality tables and the decline in discount rates, strained key financial metrics.”