Preliminary analysis by Moody’s Investor Services of fiscal year 2013 audited financial statements for not-for-profit hospitals indicates that, as expected, revenue increases did not keep pace with increases in expenses even as hospitals focused on cost containment.

The analysis included end-of-year financial statements for about 45 percent of Moody’s rated portfolio of hospitals and single-state health systems, and primarily reflected results from hospitals that reported their 2013 financials by September 30, 2013.

Moody’s noted that despite increasing costs for physician alignment and information technology, the median annual expense growth rate for its rated not-for-profit acute care hospitals declined in fiscal year 2013 compared to fiscal year 2012. It attributed this to a focus by hospital operators on cost containment and shifting care to lower-cost and more efficient settings.

However, even as the expense growth rate slowed, the revenue rate increase slowed even more due to factors such as:

• cuts in government healthcare spending
• low rate increases from commercial payors
• more patients care being covered by governmental payors
• an increase in high-deductible health plans that contribute to increases in bad debt and lower healthcare demand
• more outpatient visits and observation stays from inpatient admissions

Overall, the annual expense growth rate (4.6 percent) outpaced the annual revenue growth rate (4.1 percent) and made 2013 the second year in a row that expenses have grown faster than revenues. As a result, the preliminary median operating margin and operating cash flow margin for not-for-profit hospitals declined in fiscal year 2013 for a second year in a row.

The Moody’s analysts predicted that the final medians incorporating 2013 financials from its full portfolio of 448 rated not-for-profit acute care hospitals and single-state health systems will show even weaker operating performance than the preliminary medians due to the inclusion of more hospitals with calendar year-end audits after September 30, 2013 as well as hospitals concentrated in geographic regions with weaker economies.