Not-for-profit hospitals improved financially in 2015—but analysts say it won’t last

The operating performance for not-for-profit hospitals improved “across the board” in fiscal year 2015, according to Fitch Ratings, but those figures are expected to drop off in 2016 and 2017 thanks to changes in CMS reimbursement.

The ratings agency’s analysis said average operation margins rose from 3 percent in 2014 to 3.5 percent in 2015, with the average operation margin before taxes and interest also improving to 9.7 percent to 10.3 percent.

Fitch credited the rise in margins to improved insurance rates (the number of uninsured is now at an all-time low), improved cost efficiencies, and “greater focus on revenue cycle improvement and fee collections.” The rise in popularity of high-deductible health plans, which can create “increased seasonality of patient volumes,” didn’t affect margins, as Fitch said hospitals have been able to adapt.

Reports in the near future, however, aren’t expected to be as positive.

“Over the next 36 months we believe the movement to risk-based payer contracts from managed care contracting is likely to gain momentum, mainly because their most common proponents, larger and more integrated health systems, have emerged in several major metropolitan areas,” the Fitch analysis said. “This transition will likely heighten existing pressure on operating margins. The likelihood of margin compression will be greater for hospitals with less experience in managing risk and those with smaller revenues bases and mostly fixed expenses.”

Those pressures, the rating agency said, are likely to hit smaller providers the hardest, likely driving more hospitals to consider joining the growing consolidation trend.