Have not-for-profit hospitals peaked financially?

Not-for-profit hospitals may have already reached their financial peak, according to an analysis from Fitch Ratings. Lower operating margins and lower reimbursement payments are causing many hospital systems to rethink care delivery, but not all providers are able to meet the challenges head on, particularly in a period of mass consolidation.

With acute care operating profitability on pace for another consecutive decline, larger hospital systems are planning cost-cutting measures, including eliminating waste and rethinking how to best deliver care to align with Medicare rates. However, smaller providers may not be able to keep up, according to Fitch Ratings Senior Director Kevin Holloran.

"Smaller hospitals are characteristically less able to trim expenses and typically unable to negotiate higher rates from commercial insurers in their markets," he wrote in the analysis.

The changing reimbursement and shifts across the broad healthcare system will likely encourage not-for-profit hospital consolidation to continue, if not accelerate, Fitch predicted.

Bigger hospitals are more likely to succeed under new payment structures. However, hospital systems still need to exercise prudence in transactions, as bigger doesn’t always mean better.

"Size and scale are 'better' for a hospital's rating if its enhanced size and scale means improved operations, stronger balance sheets and more market essentiality," Holloran wrote. "Conversely, a hospital getting bigger just for the sake of getting bigger at times can lead to an initial dip in operating profitability as the two or more organizations come together."

Down the line, critical access hospitals may be facing the most headwinds, Fitch predicted. As independent facilities far away from the next closest facility and burdened with short stays, this sub-sector earned a negative outlook from the ratings company. The facilities are likely to “close altogether or become freestanding centers” that specialize in triage services, but little else.

"Critical access hospitals have long benefited from higher levels of cost-based reimbursement, though even that will likely not be enough to secure a long-term future for these facilities," Holloran said.