For the second straight year in a row, nonprofit hospital expenses have increased more than revenue, according to a study of 383 hospital systems by Moody’s Investors Service released on August 27, 2014.  In an article published the same day by the New York Times, nonprofit hospital financial performance for 2013 was characterized as the worst since the Great Recession, with hospital revenue growth slowing to a nominal low in 2013 of 3.9 percent, rather than the more typical growth in prior years of at least seven percent per year.

The gap also widened between larger and smaller hospital systems. Twenty-five percent of the reviewed hospitals reported an operating loss. Moody’s noted that the larger hospital systems overall had higher revenue growth and attributed this to greater ability to negotiate with third party payors, as well as having scale to control costs better.

Interestingly, Moody’s also contrasted their studied nonprofit hospital systems with certain for-profit hospital systems, such as HCA and LifePoint, and found that the for-profit systems generally were reporting higher revenue growth then their nonprofit hospital cohort.  For example, LifePoint reported in the second quarter of 2014 a year on year revenue growth of approximately 17 percent over the same 2013 period and a quarterly profit increase of forty-four percent.

Moody’s noted that last year’s results did not reflect the potentially beneficial effect of the expanded insurance coverage for patients under Medicaid or the health insurance exchanges, but stated that nonetheless it expects continued financial weakening of the nonprofit hospitals.

What do these study results mean for the future of nonprofit hospital systems?  We think that we will see continuation and acceleration of hospital system affiliations, mergers and alliances, as systems reach for scale, greater market share to become the “indispensable network,” infrastructure investment to initiate population health management systems, and reduction of duplicative administrative costs.  We also believe that, as many hospital systems have concluded in the past six months, shifting to risk-based and/or value-based reimbursement systems has become an imperative now for survival.