September 3, 2019 / TARA BANNOW
Not-for-profit hospital and health systems’ median operating margins bounced back more than 10% in 2018 over the prior year following two straight years of margin declines, with the biggest gains concentrated at the low end of the ratings spectrum, according to a new report from Fitch Ratings.
The median operating margin was 2.1% in 2018 across the 220 not-for-profit hospitals and health systems Fitch rates, compared with 1.9% in 2017. Within that, AA-rated providers saw their median operating margins decline from 5.1% to 4.5% during that time. At the other end of the spectrum, providers rated BBB- saw their margins improve from -1.2% to -0.7%.
It’s a “very good sign” for the industry that the lower-rated credits performed better, as they tend to be more subject to the whims of the market than higher-rated systems, said Kevin Holloran, author of the report and senior director with Fitch.
“We’re not out of the woods yet,” he said. “But it’s important to note those smaller credits made the most meaningful gains. This shouldn’t be a flash in the pan. It should be an industrywide shift.”
Fitch still maintains a negative outlook for the not-for-profit hospital sector, as it has for about two years, but Holloran said the agency will likely revisit that in November or December. He thinks operating profitability bottomed out in 2017, and will continue to inch back up in the coming years.