Hospital operating margins decline 21% in 2019, tracking firm finds

• Operating margins for hospitals declined 21% in 2019.
• Small hospitals and those in the Great Plains region performed the worst financially.
• Two rating agencies recently moved their outlooks for not-for-profit hospitals from neutral to positive amid what they saw as strong financial performance.

Operating margins declined in much of 2019, with small hospitals experiencing the worst performance, according an industry finance tracking firm.

Kaufman Hall’s monthly analysis for about 800 hospitals found a 21.3% decline in operating margins and a 14.5% decrease in EBITDA operating margins from November 2018 to November 2019.

The firm cited poor patient volumes and revenues and higher-than-expected labor and nonlabor expenses.

Where the margins weren’t

Hospital margins varied widely in different parts of the country, including:

• A 21.8% decline in operating EBITDA margin in the Great Plains region
• A 4.8% decline in operating EBITDA margin in the West region
• A 12.2% decline in operating EBITDA margin in the South region
• A -10.3% variance to budget for operating EBITDA margins in the Northeast/Mid-Atlantic region
• A -7.2% variance to budget for operating EBITDA in the Midwest region
• A -2.6% variance to budget for operating EBITDA in the South region

Did size relate to hospital performance?

Operating EBITDA margin declined during the period for all hospital categories based on bed size, Kaufman Hall found. Additionally, November was the fifth straight month of profitability decreases for the largest hospitals — those with at least 500 beds — and their EBITDA margin declined nearly 15% over the entire period.

Operating EBITDA margin at the smallest hospitals — those with fewer than 26 beds — declined 22.8%, which was the most significant year-over-year decline among any hospital type. Kaufman Hall blamed margin declines among those hospitals on a nearly 8% drop in inpatient discharges and the attendant lost revenue.

Operating EBITDA margins declined 13.7% over the year at hospitals with 200-299 beds and 1.7% at hospitals with 100-199 beds.

Views differ on hospitals’ 2019 performance

The Kauffman Hall findings came the same month that Moody’s Investor Service and Fitch Ratings changed their sector outlooks for the not-for-profit hospitals they track from negative to stable, citing improved financial performance.

For instance, Fitch expected “operating profitability will likely continue to level off in 2020, following the slight uptick in our 2019 medians showing improved profitability for the ‘BBB’ category credits and improvements in the negative slope of the curve in our ‘A’ and ‘AA’ category credits.”

Additionally, Fitch noted that balance sheet strength remains at essentially an all-time high for the sector.

“By any traditional measure — days cash on hand, debt to capitalization — the sector has benefited from favorable investment market conditions, positive cash flow and generally manageable spending on capital expenditures,” Fitch wrote. “All of these combined to push key balance sheet measures to levels not seen since before the 2008 market crash, and have, to a large extent, mitigated some of the operational pressures seen in the sector in recent years.”

Moody’s found that increasing inpatient admissions in 2019 were fueling revenue growth.

Citing revenue growth and stricter cost controls, Moody’s estimated a 2019 increase of more than 2% in operating cash flow.