Moody's not-for-profit hospital medians, based on fiscal year (FY) 2011 data, show continued adjustment by hospitals to maintain operating stability despite weakness in patient demand and as the sector prepares for healthcare reform and federal deficit pressures, says Moody's Investors Service in a report.

"While median revenue growth showed an uptick to 5.3% in FY 2011, it remained low by historical standards, and will likely fall again in coming years due to tightening federal funding," said Moody's AVP-Analyst Sarah Vennekotter, author of the report, "U.S. Not-for-Profit Hospital Medians Show Operating Stability Despite Flat Inpatient Volumes and Shift to Government Payers."

Inpatient volumes have been entrenched since the financial crisis of 2008-09 and have remained weak due to continuing high unemployment and cutbacks in employer insurance. They showed no growth for the third consecutive year while Medicare, Medicaid, and self-pay revenues increased, reports Moody's.

"This is an ominous combination for the not-for-profit hospital industry due to the lower reimbursement rates from these payers," said Vennekotter. "Despite these weak indicators, the sector's median operating margin and operating cash flow margin remained stable in FY 2011."

Balance sheet measures improved in FY 2011, and most providers' cash and investments portfolios remained highly liquid. But weak equity returns over the last 12 months means balance sheets are stagnating for most hospitals.

"For FY 2013 and beyond, we expect lower payments for inpatient procedure from all payers and a continued shift to outpatient modalities as healthcare reform rewards hospitals that operate more efficiently and deliver high-quality care," said Vennekotter. "Reimbursement changes under reform and looming federal deficits will inevitably result in more Medicare and Medicaid reductions to hospitals on a per-patient basis."

Also, she said, margins are likely to soften due to losses on physician employment strategies, and the continuous pressure on revenues, prompting hospital management teams to continue to focus on expense reductions.

In FY 2011, the median expense growth rate of 5.0% created some distance from the 5.3% revenue growth rate of FY 2010 when revenue and expense growth rates were nearly identical at 4.2% and 4.1%, respectively, according to Moody's.

"Expense reductions will remain a major focus as hospitals prepare for weaker revenue growth and further changes to federal policies and regulations in coming years," said Vennekotter.

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