Not-for-profit hospital margins improved in 2004, but credit gap widens

Healthcare Financial Management, March, 2005

A Standard & Poor's report on not-for-profit health care has found a widening gap in hospitals' credit quality in 2004, a gap that is expected to expand further in 2005. Median ratios generally improved across the sector, with improvement more pronounced at the higher end of the rating spectrum. This year may look a lot like 2004, but it may also represent a "period of calm before more turbulent times" expected in 2006. Key drivers of above inflation costs are pharmaceuticals, labor, and pensions.

The challenges for not-for-profits in 2005 include the financing of large capital plans, particularly from the stronger organizations striving to maintain their competitive advantages. Capital spending is expected to remain "buoyant during the coming year." Renewed focus on strategic capital spending, S&P says, calls for enhanced planning and analysis. The report suggests that curtailing capital spending could be a useful short-range strategy to preserve liquidity, but cautions that this strategy would create long-term problems that are hard to solve.

Meanwhile, the outlook for investor-owned hospital companies ranges mostly from negative to stable, as admissions have generally declined and significant operating pressures have come from larger bad-debt expenses and declining margins. Marginal to weak performers will be challenged to sustain positive operating results in an environment in which favorable payment is more difficult to attain.

To read the Jan. 10 S&P report, U.S. Not-for-Profit Health Care 2005 Outlook: The Calm Before the Storm, go to www2.standardandpoors.com, and enter the term "calm before" in the upper right search box.

To read HFMA's Financing the Future series, go to www.financingthefuture.org.