Minnesota hospitals see margins slip below 2% mark

A new report finds that operating margins slipped in 2018 for hospitals in Minnesota, a finding that a trade group said highlights financial challenges for the sector — but not a crisis.

The report from the Minnesota Hospital Association cited increased expenses as well as revenue pressures in finding the median operating margin declined from 2.2% in 2017 to 1.7% in 2018.

From 2014 to 2018, urban hospitals saw a more pronounced decline in operating margins than rural hospitals, the report said, although it did not speculate on what might explain the trend.

"Historically Minnesota's urban hospitals have had higher margins than rural hospitals; however, the gap has narrowed in recent years," said the report, which looks at financial performance at 78 hospitals and health systems in the state during 2018. A summary of the report said hospitals overall were contending with "pressure to reduce costs from both government and commercial payers; health care professional shortages; and increasing costs of products and supplies."

While those challenges remain for hospitals across the county, the sector's outlook has improved somewhat since 2018, said Dan Steingart, an analyst with Moody's Investors Service. The rating agency in December revised the outlook for nonprofit hospitals and health systems from negative to stable.

Payment rates from private health insurers aren't getting any worse for hospitals, Steingart said, and hospitals have received relatively good news about Medicare rates in the near term. Most hospitals haven't yet reported full-year numbers for 2019, but Steingart said partial-year financial results were looking somewhat better than figures for 2018.

"Things are basically stable right now," Steingart said. "It doesn't mean that it's great times and it's easy to operate a hospital right now, because we really don't think that at all. … There are several issues going on, on both the reimbursement side and on the operating expense side."

The operating margin is the ratio of operating income to revenue, and reflects earnings from patient care without factoring income from investments. Positive operating margins are necessary, the trade group said, so that hospitals can maintain credit ratings, invest in facilities and recruit and retain workers.

The median operating margin at urban hospitals was 2% in 2018 compared with 1.6% for rural hospitals, according to the report. Back in 2014, the median operating margin was 4.2% at urban hospitals compared with 1.3% at rural medical centers.

The report found that while 51 of the 78 hospitals and health systems generated positive operating margins in 2018, the remaining 27 hospitals saw negative operating margins.

"The median operating margin is still positive," said Dr. Rahul Koranne, the president and CEO of the trade group, in an interview. "We want to make sure that folks don't look at this and say: 'Oh, my goodness, are some hospitals going to close?' I don't think that's a conclusion that should be drawn."

The message from the report, Koranne said, is that hospitals are paying more for medications, medical devices, electronic health records and workers at a time when health insurers and the government are trying to hold the line on payment rates.