Operating margins take a hit, again
Hospital operating margins continued to plummet in 2018, even as balance sheets remain stronger than ever. Martin Arrick, a managing director in S&P Global’s U.S. public finance division, said health systems continued to depend heavily on non-operating income throughout the year, and non-operating margins exceeded operating margins.
“Normally it’s the other way around,” he said. “That points to a dependence on non-operating income.”
That proved to be a thorn in the sides of some systems in 2018 when the stock market failed to deliver to the same degree as in 2017, a banner year. Oakland, Calif.-based Kaiser Permanente’s net non-operating income fell 52% in the third quarter of 2018 year-over-year mostly due to the volatile equities market, but an executive told Modern Healthcare the system does not plan to change its investment strategy.
Others saw solid stock market returns, but still kept capital spending modest, according to a November report from Fitch Ratings. One-quarter of hospitals had AA- ratings at the time of the report, up from 17% at the same time in 2017, mostly because hospitals’ ratings improved under Fitch’s new rating criteria. Meanwhile, fewer hospitals were rated BBB+ or below.
The year also saw a continued transition toward value-based care. There weren’t any huge moves; more like providers gradually positioning themselves to take on risk, whether in the form of insurance contracts or through bundled payments.