CHICAGO — Operating margins continue to weaken in the non-profit health care sector despite balance sheets strengthened by strong investment returns, according to Standard & Poor's health care analysts.
The sector saw several areas of improvement in 2013, according to Standard & Poor's annual median report. But strong gains in areas like investment returns and unrestricted reserves masking weak underlying performance, analysts warned Thursday in a web presentation on the 2013 median report.
"The compression in operating margins I think is serious," analyst Martin Arrick said. "It indicates a wide range of pressures in the sector."
The ratings agency expects the margin compression to persist for at least a year and likely longer.
Weak patient volumes have driven much of the performance problems, Arrick said.
"Same-store revenue growth has been softer over time and providers have done a pretty good job over the years of cost cutting and being able to maintain margins," said Arrick. "The difference this year is that falling volumes have really been too tough for many providers to overcome," he said. "That's why we're seeing compressed margins. It's getting harder and harder to keep up with the revenue pressures, which by and large aren't new."
The impact of the Affordable Care Act, which is already resulting in an increased number of insured Americans, is too new to measure, analysts said. The new law is expected to boost patient volumes and bring in new revenues, though it's too early to draw conclusions, Arrick said.
The sector's underlying weakness persisted in 2013 despite nice growth in other areas, including patient revenues, which grew 5% in 2013 compared to 2012. Unrestricted reserves grew 15% with systems and stand-alone providers taken together.
Days-cash-on-hand, an important measurement for many analysts, was relatively flat. Maximum annual debt service coverage was also flat year over year, at 2.4 times in 2013 and 2012 for systems. For stand-alone hospitals, maximum annual debt service was 3.5 in 2013 compared to 3.6 times in 2012.
Coming off a strong investment year, the sector enjoyed big gains in market returns and donations, Standard & Poor's said. That comes with its own risk however, if manager start to depend on the revenues, which are outside of their control, analysts said.
Capital spending was down as "providers continue to build up a cushion," Jennifer Soule said. "Many providers are being judicious with their capital plans," said Soule. "We've seen some pull back on originally budgeted capital plans as they assess their operating performance. If it was weaker, they delayed the plan."
Capital spending would be down further if not for significant spending on information technology, she added.
Reflecting ongoing challenges, downgrades have outpaced upgrades so far in 2014, analysts said. Affirmations remained the largest category, accounting for 78% of ratings actions, down from 86% for the same period last year.