APRIL 23, 2014

U.S. PUBLIC FINANCE

MEDIAN REPORT

Profitability and Revenue Growth Drop in US Not-for-Profit Hospital Preliminary Medians
Summary
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Operating Performance Pressure Continues as Predicted; Balance Sheet Measures Remain Stable

Table of Contents:
SUMMARY MAJOR FINDINGS FROM FY 2013 PRELIMINARY MEDIANS FINAL FY 2013 MEDIANS TO BE PUBLISHED IN THE SUMMER 2014 APPENDIX 1: FREESTANDING HOSPITALS, SINGLE-STATE MEDIANS FISCAL YEARS 2011-2013 [1] APPENDIX 2: FREESTANDING HOSPITALS, SINGLE-STATE MEDIANS BY BROAD RATING CATEGORY, FY 2013 [1] MOODY’S RELATED RESEARCH

The fiscal year (FY) 2013 not-for-profit hospital preliminary medians point to continuing operating pressures in the industry. Both the operating margins and operating cash flow margins dropped as revenue growth continued to slow and expense growth continued to surpass revenue growth. Debt coverage metrics remained stable and balance sheet measures grew despite weaker operating performance. Important findings discussed in this report include: » » Median operating margins and operating cash flow margins declined, reflecting continued operating pressure on not-for-profit hospitals. Median expense growth outpaced median revenue growth for a second year contributing to the drop in margins. Unrestricted cash and investments grew as equity market returns were strong and capital spending levels decreased.

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Analyst Contacts:
NEW YORK +1.212.553.1653

»

Jennifer Ewing +1.212.553.4429 Analyst jennifer.ewing@moodys.com Lisa Martin Senior Vice President lisa.martin@moodys.com +1.212.553.1423

Kendra M. Smith +1.212.553.4807 Managing Director - Public Finance kendra.smith@moodys.com

The preliminary medians are based on FY 2013 audited financial statements of about 45% of Moody’s rated portfolio. These medians primarily reflect audit year ends of September 30, 2013 and prior; therefore, they do not incorporate the full impact of the Affordable Care Act (ACA) as coverage under the individual mandate did not go into effect until January 1, 2014. We present the preliminary medians in two formats: by year for three years, FY 2011-FY 2013 (Appendix 1), and by rating category for FY 2013 (Appendix 2).

U.S. PUBLIC FINANCE

Major Findings from FY 2013 Preliminary Medians
» Profitability margins continued to decline. The preliminary median operating margin and operating cash flow margin declined in FY 2013 for a second year in a row. The declines in both margins come after several years of growth or stability in profitability (see Exhibit 1). The drop is also seen across the Aa and A rating categories, while the Baa and below-Baa rating categories remain relatively flat compared to the prior year. The margin declines reflect the second straight year of the annual expense growth rate (4.6%) outpacing the annual revenue growth rate (4.1%) as well as a decline of the median annual revenue growth rate (see Exhibit 2). The decline in performance can be attributed to a number of factors including: 1) low rate increases from commercial payors and rate cuts from Medicare and Medicaid; 2) a payor mix shift to governmental payors from commercial payors; 3) an increase in high-deductible health plans with higher levels of patient responsibility contributing to increases in bad debt and lower healthcare demand; and 4) a shift to lower reimbursed outpatient visits and observation stays from inpatient admissions.
EXHIBIT 1

Profitability Margins Dropped in FY 2013
Preliminary Median Operating Margin 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2010 2011 2012 2013 Preliminary Median Operating Cash Flow Margin

Source: Moody’s. Margins for each year are calculated with bad debt as an operating revenue deduction and based on audited financial statements for the same 203 organizations.

»

For research publications that reference Credit Ratings, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated Credit Rating Action information and rating history.

Median expense growth rate dropped, but remained greater than the median revenue growth rate for a second straight year. The median annual expense growth rate declined in FY 2013 compared to FY 2012, demonstrating a focus on cost containment among hospital operators and the shifting of care to a lower-cost and more efficient setting. The median annual revenue growth rate continued its decline, dropping to 4.1% from 4.6% (see Exhibit 2). It remained lower than the median expense growth rate for a second year in a row contributing to the drop in operating margins. The slowdown in expense growth comes in the midst of increasing costs for physician alignment and information technology, but demonstrates strategies and focus on cost control. We anticipated the decline in revenue growth in FY 2013. 1 For some hospitals, however, revenue growth was supported by nonrecurring funding sources, including information technology, meaningful use payments and payments under state provider fee programs.

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2014 Outlook – US Not-for-Profit Hospitals

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APRIL 23, 2014

MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS

U.S. PUBLIC FINANCE

EXHIBIT 2

Median Expense Growth Rate Exceeded Median Revenue Growth Rate For a Second Year in FY 2013
Median Annual Revenue Growth Rate 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Median Annual Expense Growth Rate

Source: Moody’s. The data prior to 2013 are from different sample sets. However the multiple years of data still accurately reflect the trend in the industry over this period. * 2013 is based on audited financial statements of 203 organizations.

»

Balance sheet ratios remained stable despite lower cash flow. The median unrestricted cash and investments increased in FY 2013 compared to FY 2012. This growth is consistent across all rating categories and comes as equity market returns were strong and capital spending levels declined. With the increase in cash, preliminary median days cash-on-hand increased, while median cash-to-direct debt remained relatively stable. The median cash-to-comprehensive debt improved as discount rates increased and market returns were strong, reducing defined benefit pension plan liabilities.

Final FY 2013 medians to be published in the summer 2014
We expect the final medians to show weaker operating performance than the preliminary medians due to the inclusion of more hospitals with calendar year-end audits after September 30, 2013 as well as hospitals concentrated in geographic regions with weaker economies. We anticipate the maintenance of general healthy balance sheet ratios in similar to the preliminary medians. The full medians report will reflect a larger sample size of our rated portfolio of hospitals and health systems. Our entire portfolio of not-for-profit acute care hospitals and single-state health systems consists of 448 rated organizations. We exclude certain specialty hospitals, such as children’s hospitals, cancer centers, and other non acute-care organizations from the medians. The preliminary medians differ from the full medians in some important respects. Most significantly, the preliminary medians consist mainly of audits ended June 30, 2013 and prior, with a smaller number of audits ended September 30 (see Exhibit 3). In contrast, we estimate just over 60% of the full year medians will consist of audits ended after June 30.

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APRIL 23, 2014

MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS

U.S. PUBLIC FINANCE

EXHIBIT 3

Distribution of Fiscal Year End Dates for 203 Free-Standing and Single-State Systems Included in FY 2013 Preliminary Medians
Oct-1 to Dec-31 1%

July-1 to Sept-30 36%

Jun-30 & Prior 63%

Source: Moody’s.

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MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS

U.S. PUBLIC FINANCE

Appendix 1: Freestanding Hospitals, Single-State Medians Fiscal Years 2011-2013 [1]
NOTE: Bad debt is presented as an expense for FY 2011 and as a revenue deduction for FY 2012 and FY 2013. Published FY 2012 Medians are presented with bad debt as a revenue deduction.
Preliminary Medians 2011 Preliminary Medians 2012 Preliminary Medians 2013 Published Medians 2012

Utilization [2] Maintained Beds Admissions Observation Stays Combined Admissions and Observation Stays Patient Days Medicare Case Mix Index Average Length of Stay (Days) Maintained Bed Occupancy (%) Emergency Room Visits Outpatient Visits Outpatient Surgeries Financial Performance ($000) Net Patient Revenues Total Operating Revenue Interest Expense Depreciation and Amortization Expense Total Operating Expenses Income from Operations Operating Cash Flow Excess of Revenue Over Expenses Net Revenue Available for Debt Service Debt Service Additions to Property, Plant, & Equipment Balance Sheet ($000) Unrestricted Cash and Investments Total Direct Debt Total Comprehensive Debt Net Fixed Assets Unrestricted Net Assets Monthly Liquidity Annual Liquidity 259,360 190,991 263,545 265,177 345,907 228,935 241,286 254,938 198,063 284,499 284,876 329,308 228,353 253,814 285,748 213,325 276,334 286,132 372,543 247,217 238,032 257,819 218,738 294,491 305,443 331,911 254,917 264,781 507,885 528,222 7,662 26,919 504,684 14,749 52,804 30,959 67,066 15,380 34,756 479,083 515,276 7,267 27,978 500,082 14,706 53,393 31,124 67,670 13,513 39,354 495,718 542,128 7,932 30,689 531,149 10,775 48,312 26,395 65,567 15,617 36,688 488,218 527,589 8,104 29,819 506,597 13,392 52,297 29,811 68,313 15,508 38,973
[3]

433 23,215 4,797 27,873 107,396 1.60 4.7 66.6 81,367 298,927 10,440

421 24,027 5,736 28,908 104,463 1.60 4.6 63.7 83,344 319,886 10,323

442 23,380 6,263 29,858 107,292 1.63 4.7 64.7 85,812 345,870 10,389

421 24,262 5,218 28,908 109,330 1.59 4.6 63.5 81,703 291,039 10,516

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APRIL 23, 2014

MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS

U.S. PUBLIC FINANCE

Preliminary Medians 2011

Preliminary Medians 2012

Preliminary Medians 2013

Published Medians 2012

Key Ratios [4] Operating Margin Excess Margin Operating Cash Flow Margin Cash on Hand (Days) Cash-to-Direct Debt Cash-to-Comprehensive Debt Maximum Annual Debt Service Coverage (x) Annual Debt Service Coverage (x) Debt-to-Cash Flow (x) Debt-to-Total Operating Revenue Annual Operating Revenue Growth Rate Annual Operating Expense Growth Rate 3 Year Operating Revenue CAGR 3 Year Operating Expense CAGR Debt-to-Capitalization Current Ratio (x) Cushion Ratio (x) Return on Assets Accounts Receivable (Days) Average Payment Period (Days) Capital Spending Ratio (x) Average Age of Plant (Years) Monthly Liquidity to Demand Debt Annual Liquidity to Demand Debt Demand Debt as a % of Total Direct Debt Cash to Demand Debt Monthly Liquidity to Total Cash and Investments Patient Revenue Sources by Gross Revenue (%) [5] Medicare Medicaid Commercial Self Pay & Other 43.7% 13.0% 34.0% 7.7% 43.9% 13.0% 33.0% 8.0% 44.3% 12.9% 32.1% 7.6% 44.1% 13.1% 33.4% 7.6% 2.7% 5.4% 9.5% 179.9 132.1% 95.1% 4.5 4.8 3.3 34.9% 5.3% 4.8% 5.7% 5.2% 37.9% 2.0 16.5 4.8% 44.3 57.1 1.1 10.1 346.2% 368.4% 34.5% 383.4% 98.2% 2.5% 5.5% 9.8% 195.9 134.8% 91.8% 4.4 4.8 3.3 37.2% 4.6% 5.4% 5.0% 5.0% 38.3% 1.9 17.5 4.4% 50.2 64.2 1.3 10.4 360.8% 393.5% 32.2% 408.5% 99.3% 2.2% 5.2% 9.3% 204.3 137.4% 100.7% 4.4 4.6 3.4 36.5% 4.1% 4.6% 4.9% 5.0% 35.2% 1.9 18.4 4.2% 50.0 61.3 1.1 10.7 405.1% 428.0% 31.1% 448.3% 98.8% 2.5% 5.2% 9.5% 185.3 126.2% 89.5% 4.3 4.6 3.4 37.6% 5.2% 5.5% 5.1% 5.1% 38.9% 1.9 16.2 4.3% 49.9 64.3 1.2 10.6 346.2% 396.8% 34.5% 415.6% 97.6%

[1] Financial data are based on audited financial statements for 203 free-standing hospitals and single-state healthcare systems. [2] Utilization statistics are based on a smaller sample size where three years of consistent data are available. [3] Combined Admissions and Observation Stays is a separately calculated median and does not equal the sum of median Admissions and median Observation Stays. [4] Monthly and Annual Liquidity statistics are based on a smaller sample size where three years of consistent data are available. [5] Payor Mix columns do not sum to 100% because each entry is a separately calculated median.

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APRIL 23, 2014

MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS

U.S. PUBLIC FINANCE

Appendix 2: Freestanding Hospitals, Single-State Medians by Broad Rating Category, FY 2013 [1]
All Ratings Sample Size 203
[2]

Aa 35

A 103

Baa 53

Below Baa 12

Utilization Admissions

Maintained Beds Observation Stays Combined Admissions and Observation Stays Patient Days Medicare Case Mix Index Average Length of Stay (Days) Maintained Bed Occupancy (%) Emergency Room Visits Outpatient Visits Outpatient Surgeries Financial Performance ($000) Net Patient Revenues Total Operating Revenue Interest Expense Depreciation and Amortization Expense Total Operating Expenses Income from Operations Operating Cash Flow Excess of Revenue Over Expenses Net Revenue Available for Debt Service Debt Service Additions to Property, Plant, & Equipment Balance Sheet ($000) Unrestricted Cash and Investments Total Direct Debt Total Comprehensive Debt Net Fixed Assets Unrestricted Net Assets Monthly Liquidity Annual Liquidity
[3]

442 23,380 6,263 29,858 107,292 1.63 4.7 64.7 85,812 345,870 10,389 495,718 542,128 7,932 30,689 531,149 10,775 48,312 26,395 65,567 15,617 36,688 285,748 213,325 276,334 286,132 372,543 247,217 238,032

1,002 53,621 15,699 69,320 274,601 1.73 5.1 71.9 158,824 741,774 25,472 1,436,949 1,546,874 20,092 85,725 1,479,641 84,725 183,868 161,863 251,795 31,398 122,341 1,065,893 550,008 767,555 866,203 1,275,879 977,321 1,020,680

428 21,689 6,162 29,714 101,033 1.62 4.6 64.5 85,623 284,421 10,528 495,776 536,879 7,474 30,689 525,956 12,032 49,321 29,329 69,508 14,441 36,302 313,902 189,201 250,819 276,593 429,376 282,002 285,748

307 15,564 4,262 19,716 66,237 1.59 4.4 61.4 54,765 286,179 7,232 348,200 363,702 6,380 20,329 358,078 2,612 27,729 8,995 38,293 13,612 17,106 147,303 153,142 211,531 179,454 183,643 124,530 130,363

303 13,548 2,664 18,778 67,375 1.54 5.0 66.5 64,622 177,422 6,165 310,533 328,609 5,007 14,395 340,999 (3,289) 10,256 4 15,302 9,654 16,989 67,871 113,984 211,651 138,834 79,325 75,596 67,871

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APRIL 23, 2014

MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS

U.S. PUBLIC FINANCE

All Ratings Sample Size 203

Aa 35

A 103

Baa 53

Below Baa 12

Key Ratios [4] Operating Margin Excess Margin Operating Cash Flow Margin Cash on Hand (Days) Cash-to-Direct Debt Cash-to-Total Comprehensive Debt Maximum Annual Debt Service Coverage (x) Annual Debt Service Coverage (x) Debt-to-Cash Flow (x) Debt-to-Total-Revenue Annual Operating Revenue Growth Rate Annual Operating Expense Growth Rate 3 Year Operating Revenue CAGR 3 Year Operating Expense CAGR Debt-to-Capitalization Current Ratio (x) Cushion Ratio (x) Return on Assets Accounts Receivable (Days) Average Payment Period (Days) Capital Spending Ratio (x) Average Age of Plant (Years) Monthly Liquidity to Demand Debt Annual Liquidity to Demand Debt Demand Debt as a % of Total Direct Debt Cash to Demand Debt Monthly Liquidity to Total Cash and Investments Patient Revenue Sources by Gross Revenue (%) Medicare Medicaid Commercial Self Pay & Other
[5]

2.2% 5.2% 9.3% 204.3 137.4% 100.7% 4.4 4.6 3.4 36.5% 4.1% 4.6% 4.9% 5.0% 35.2% 1.9 18.4 4.2% 50.0 61.3 1.1 10.7 405.1% 428.0% 31.1% 448.3% 98.8% 44.3% 12.9% 32.1% 7.6%

3.5% 7.2% 10.0% 252.0 194.8% 146.3% 6.5 7.5 2.5 31.9% 6.7% 6.7% 6.1% 6.2% 32.0% 1.9 29.4 6.1% 45.3 67.8 1.5 9.1 424.4% 459.3% 37.9% 495.0% 86.5% 40.0% 14.1% 35.7% 8.0%

2.7% 5.8% 10.1% 217.3 153.1% 110.4% 4.8 5.1 3.1 37.5% 5.4% 5.9% 5.1% 5.0% 33.0% 2.0 20.3 4.6% 51.8 58.9 1.1 10.5 371.3% 380.0% 32.2% 401.8% 98.1% 46.1% 12.3% 32.0% 7.8%

1.0% 3.4% 8.5% 147.7 103.9% 72.9% 3.2 3.4 4.5 37.0% 2.2% 4.2% 4.0% 4.4% 44.1% 2.0 12.7 3.0% 48.0 61.0 1.0 11.2 312.1% 448.3% 21.7% 448.3% 100.0% 43.6% 13.4% 32.2% 7.2%

-1.6% 0.0% 4.8% 84.4 60.0% 37.3% 1.4 1.5 7.7 38.1% 2.8% 3.7% 2.4% 2.7% 56.5% 1.5 6.0 0.0% 48.3 65.1 1.0 12.0 697.8% 697.8% 12.9% 697.8% 100.0% 49.1% 15.9% 29.1% 6.0%

[1] Financial data are based on audited financial statements for 203 free-standing hospitals and single-state healthcare systems. [2] Utilization statistics are based on a smaller sample size where three years of consistent data are available. [3] Combined Admissions and Observation Stays is a separately calculated median and does not equal the sum of median Admissions and median Observation Stays. [4] Monthly and Annual Liquidity statistics are based on a smaller sample size where three years of consistent data are available. [5] Payor Mix columns do not sum to 100% because each entry is a separately calculated median.

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APRIL 23, 2014

MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS

U.S. PUBLIC FINANCE

Moody’s Related Research
Outlook:

» »

2014 Outlook – US Not-for-profit Hospitals, November 2013 (160569) US Not-for-Profit Hospital 2012 Medians Show Balance Sheet Stability Despite Weaker Performance, August 2013 (157417) US Healthcare Reform: Three Risks Reduce Credit Positives for Not-for-Profit Hospitals, March 2014 (166602) Two-Midnight Rule Will Reduce Revenue For Most Hospitals, March 2014 (165866)

Median Report:

Special Comments:

» »

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

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APRIL 23, 2014

MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS

U.S. PUBLIC FINANCE

Report Number: 167463

Author Jenn Ewing

Production Associate Prabhakaran Elumalai

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MEDIAN REPORT: PROFITABILITY AND REVENUE GROWTH DROP IN US NOT-FOR-PROFIT HOSPITAL PRELIMINARY MEDIANS

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