Hospital signAs not-for-profit hospitals finally find themselves on stable ground, there could finally be relief after several years of navigating a rocky business environment.  For the first time since 2008, credit rating agency Moody’s Investors Service upgraded the outlook on not-for-profit hospitals to “stable” from “negative”.

In a report from today, Moody’s  sector has been benefiting from an increased volume of patients and lowering bad debt, both of which are having a positive effect on operating cash flow.  The impact is most evident in states that have expanded eligibility for their Medicaid programs, where self-pay patients only account for some 3.8% of revenue when compared with 9.2% in non-expansion states.  Hospitals have been struggling with flat or declining admissions since at least 2009, but patients once again started returning in late 2014.  According to Moody’s, this was due to a combination of a virulent flu season, pent-up demand among the newly-insured and employment growth.  Such factors have buoyed hospitals even in states that didn’t expand their Medicaid rosters.  A Modern Healthcare analysis of not-for-profit hospital finances for fiscal 2014 revealed that the average operating margin in Medicaid expansion states was 3.2%, not that much different from the 3.1% in non-expansion states.

As a result of this, not-for-profit hospitals are reporting growth in operating cash flow that Moody’s says is at a multiyear high.  Operating cash flow increased 12.3% in 2014, compared with just .3% in 2013.  It also increased a healthy 11.5% in the first quarter of 2015.  The financial improvement isn’t just coming from the additional revenue that hospitals have been generating, but also from their success in managing expenses on the labor and supply sides.  Despite this good news, Moody’s has cautioned that while the uplift is likely to persist over the next 12 to 18 months, it could very well be temporary.  Hospitals have been heavily investing in population health management, and spending large amounts of capital to build lower-acuity care settings, buy physician practices and upgrade their health IT systems.  In addition, the goals of population health are to decrease utilization, in particular for higher-cost services.

Another challenge is that healthcare providers have been facing increased competition from newer entrants, such as urgent-care clinics in pharmacies.  Healthcare providers are also becoming more reliant on government insurers; Medicaid now represents 15% of revenue, up from 11.9% in 2009.  In contrast, commercial health plans account for 30.5% of revenue, down from 2009’s 35.8%.