Becker's Hospital Review

45 FINANCE Moody's: High Rate of Physician Employment Linked to Lower Profitability By Tamara Rosin N onprofit and public hospitals and health systems with very high rates of physician employment showed stron- ger revenue growth but lower profitability than those with lower employment rates, according to Moody's Investor Service's Physician Employment FY 2014 Medians report. Moody's predicts this dynamic will persist for several years as hospitals continue employing greater numbers of physicians. For its analysis, Moody's divided hospitals into four categories based on employed physicians as a percentage of the total medical staff: • Low: 1 to 15 percent • Mid: >15 to 30 percent • High: >30 to 65 percent • Very High: >65 to 100 percent Here are four key findings from Moody's report. 1. Very high levels of physician employment quell mar- gins. e median operating cash flow margin is 10.7 percent for hospitals with low physician employment, compared to 8.5 percent for hospitals with very high physician employment. 2. Physician employment contributes to higher revenue and expense growth. Hospitals with very high rates of physician employ- ment have higher revenue and higher expense growth as they absorb physician salaries and make related IT investments and staffing changes. is is evidenced by a 6.8 percent three-year revenue com- pound annual growth rate and 7.5 percent expense CAGR for hos- pitals with very high employment rates. Hospitals with low physi- cian employment, on the other hand, had a median of 4.9 percent and 5 percent, respectively. "While we expect expense growth to slow as hospitals generate efficiencies through better practice man- agement and economies of scale, direct losses on physician practic- es will remain a challenge," Moody's analysts noted. 3. Operating revenue for hospitals with very high physi- cian employment vastly exceeds the U.S. median total op- erating revenue. Hospitals with very high physician employment have a median operating revenue of $950 million compared to $431 million for hospitals with low employment and $673 million for the national median. 4. Hospitals with very high physician employment report greater outpatient revenue than inpatient revenue. Hospi- tals that employ a high volume of physicians report a greater share of outpatient revenue (54 percent) than inpatient revenue (46 percent), nearly the exact inverse for hospitals with low employment rates. n Fitch Predicts Profitability Obstacles for US Hospitals in 2016: 5 Things to Know By Emily Rappleye F itch Ratings expects margins for the largest U.S. for-profit hospital companies to be under pressure in 2016, due to some profitability challenges from last year as well as new challenges in the coming year. Here are five things to know about Fitch's projections, as presented by Reuters. 1. U.S. for-profit hospital companies reported an average 2 percent growth in patient volumes in the third quarter of 2015, but this did not translate into growth in operating margins. The lack of positive impact on operating margins marks a reversal in year-over-year improved operating margins in the last few quarters, according to the report. In the third quarter of 2015, the largest U.S. for-profit hospital companies reported an aver- age operating EBITDA margin up just 16 basis points over the same period last year, and many reported significant decline in same hospital margins, according to the report. 2. Several factors hindered profitability in 2015, though Fitch expects many to be short-lived. These factors include higher labor and supply expenses, weak growth in pricing and higher levels of uncompensated care. Acute care hospitals felt the benefits of the Affordable Care Act in early 2015, according to Fitch, but it is still too early to de- termine if the increase in uncompensated care in late 2015 was due to a tapering of the law's benefits. 3. Fitch projected a few of these challenges to car- ry over in 2016, and a few new headwinds to add to financial pressures. The commercial viability of the public health insurance exchanges and slow progress in Medicaid expansion will stall the benefits of the ACA in 2016, according to Fitch. New potential challenges include presidential election-cycle politicking and ACA news flow, which could both impact equity prices and capital deploy- ment priorities for hospital companies in the coming year. 4. Recent acquisitions provide an opportunity for hospital companies to pay down debt. Some companies continue to have high leverage from recent acquisitions, according to Fitch. "Good operating cash flow generation and proceeds from asset sales will provide an opportunity to pay down debt over the next several quarters," the re- port reads. Nonetheless, Fitch predicts cash will most likely be funneled back into acquisitions and share repurchases next year. 5. Where companies invest will determine their up- ward rating momentum in 2016. According to Fitch, most hospital companies have some buffer room under negative rating triggers, but these capital deployment decisions — payment of down debt versus acquisitions and share repurchases — will likely determine upward ratings. n

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