NFP hospital profitability plummeted in 2020 despite expense mitigation strategies, Moody’s reports

Profits unsurprisingly were down in the not-for-profit (NFP) and public healthcare sector in FY20, but management strategies helped to increase liquidity amid the COVID-19 pandemic, according to Moody’s Investors Service.

The credit-rating agency’s insights on last year’s preliminary medians for the sector drew on performance data from 130 health systems. With the caveat that final FY20 results may differ significantly from the preliminary data, Moody’s reported:

• The median operating margin for hospitals and health systems was 0.5% — down from 2.4% in FY19.
• Median operating cash-flow margin was 6.7%, down from 8.4%.
• CARES Act funding comprised between 14% and 100% of operating cash flow, with a median of 43%.
• Median operating expenses increased by 4.7%, compared with 3% revenue growth.
• Median unrestricted cash and investments rose by 27.5% due to external support (e.g., Medicare advance payments, payroll tax relief) and internal approaches (e.g., deferral of capital spending).
• Leverage metrics were mixed, with higher debt-to-cash flow (a ratio of 3.3, compared with 2.9 over the previous four years) and lower maximum annual debt service coverage (4.1, down from 4.6) but also improved cash-to-debt metrics (200%, up from 177%).

Management strategies help mitigate adverse trends

There wasn’t much that hospitals could do about FY20 revenue trends, with growth declining to 3% from 5.9% the year before. The suspension of elective procedures and slow pace of patient volume recovery were key factors, Moody’s reported.

Management did take steps to stem expense growth, which, at 4.7%, was 1 percentage point lower than in FY19. Management “curtailed labor expenses and saw some reduction in supply costs as volumes declined, particularly in elective surgeries,” Moody’s reported, even though costs of personal protective equipment increased significantly.

Management teams also deployed liquidity strategies that helped median days cash on hand increase by 44 days, to 246.9, although Medicare advance payments accounted for 30 to 40 days of that growth, Moody’s estimated.

Liquidity preservation strategies included deferments of retirement plan contributions, payroll tax remittances and capital projects.

The outlook for 2021 is negative

As of December, Moody’s maintained a negative outlook for the NFP healthcare sector this year.

“Volume and service mix disruption, reduced commercial insurance revenues from elevated unemployment and higher expenses will weigh on hospitals amid the coronavirus crisis,” according to a news release. “The pace and sustainability of recovery from last spring’s nationwide mandatory elective shutdown will be influenced by containment of the virus and widespread vaccination.”