U.S. nonprofit hospitals continue to struggle with operating margins, but key balance sheet metrics have improved, according to Fitch Ratings.
Fitch’s 2018 hospital median report, based on audited 2017 data, shows operating margins declined for the second consecutive year in every rating category. The 2017 median operating margin was 1.9 percent compared to 2.8 percent in 2016.
But the agency said key balance sheet metrics, such as days cash on hand, cash to debt and leverage, got better and are at all-time highs. For example, the median days cash on hand climbed from 195.5 in 2016 to 213.9 in 2017, and cash to debt increased to 159 percent from 142.8 percent year over year.
“Despite this apparent contradiction — which may be temporary in nature — the clear signal through the noise is that operating margins remain under pressure for the second year in a row, indicating ongoing stress in the sector,” Fitch said.
The agency said the ongoing operating margin struggles are attributable to salary and wage expense pressures, increasing pharmaceutical costs, and the shift from fee-for-service to value-based care.
Fitch finalized rating criteria changes for nonprofit hospitals revenue debt in January, which focus more on balance sheet strength compared to operating profitability. Even with declining operating margins, Fitch said its median rating for nonprofit hospitals remains ‘A.”
But “should operational pressures continue for an extended period of time, even strong balance sheets will begin to come under pressure,” said Fitch Senior Director Kevin Holloran.