Analysis: Investment income may not be enough for not-for-profit hospitals as federal reductions in payments continue

• Median investment income as a percentage of net income for Fitch’s 221 nonprofit hospital credits was 48.5%, according to Healthcare Dive.
• Reductions in federal payments to hospitals will total $252.6 billion from 2010 through 2029, according to Healthcare Dive.
• HFMA’s report Strategies for Reconfiguring Cost Structure and related toolkit highlight successful practices for reducing costs.

According to Healthcare Dive, a recent Fitch Report finds, “Investment portfolios are playing a key role for not-for-profit hospitals and their bottom lines. The investment portfolio ‘provides a financial cushion to absorb unforeseen operating challenges that may lead to potential compression in operating margins.’ Median investment income as a percentage of net income for Fitch’s 221 nonprofit hospital credits was 48.5%.”

“Over the past decade, the stock market has generally performed well for investors, so it may come as no surprise that nonprofits with investment portfolios have benefited too,” according to Healthcare Dive. “For nonprofit hospitals, investment income plays an important role in the organizations’ creditworthiness. However, hospitals with a lower credit rating are less able to weather risky investments as they may rely on those investments to fund operations, the report noted.

“Investment income is important to consider because it’s an important piece of a nonprofit’s overall financial standing. Nonprofit hospitals have long complained of thin operating margins due to less than adequate reimbursement from government payers. But less attention is paid to the investment income nonprofit hospitals bring in. For example, Ascension, one of the nation’s largest nonprofit systems, reported its income from operations was about $105 million in 2018 while its investment return was $1.6 billion, according to its consolidated financial statement for fiscal year 2018.”

Takeaway

Although investment income has always provided hospitals a financial cushion, the challenge with it is it’s directly correlated to the economic cycle. So typically, about the time that rates of the uninsured spike as the economy heads into a downturn, markets take a swan dive, significantly reducing investment income (unless you got lucky on your timing and shorted the market before it tanked). And this is only going to get more challenging in the next downturn.

A recent report commissioned by the American Hospital Association and Federation of American Hospitals, according to Healthcare Drive, finds that reductions in federal payments to hospitals will total $252.6 billion from 2010 through 2029, reflecting the cumulative impact of a series of legislative and regulatory actions. And most of those cuts are compounded, suggesting the reductions are backloaded.

As I discussed in a post last week, health systems need to breakeven on Medicare. And many organizations have that as a goal. But few are targeting cuts sufficient to get there. And even then (with lower targets than what is required to break even on Medicare), not many systems are actually achieving “most of their goals.”

HFMA’s report Strategies for Reconfiguring Cost Structure and related toolkit highlight successful practices for reducing costs that can guide organizations as they attempt to rationalize their cost structures.