Back in the early years of the current recession, evidence shows that not-for-profit hospitals and systems created stable or improved operations and kept healthy operating margins thanks to spending cuts.

Some efforts made headlines, such as construction delays and layoffs. Hospitals also froze wages, cut spending on supplies and equipment and closed or cut unprofitable services as the recession wore on.

The data shows that these cost-cutting moves and other methods of reducing spending helped hospitals rebound even as the economy continued to struggle. Operating margins largely withstood economic pressure but now the question is: Can cuts continue to outpace weak revenue.?

In a recent issue of Modern Healthcare magazine, Standard & Poor’s Managing Director Martin Arrick said, “Providers are going to have a harder and harder time offsetting what is an increasingly hostile environment.”

He suggested that the financial security of a large health system may be attractive to faltering hospitals in such conditions. “How long can you keep cutting expenditures?” he asked.

Analysts agree, warning that hospitals cannot continue to cut their way to growth. Now a new report suggests hospitals are losing ground to the weak economy. Moody’s Investors Service released its latest quarterly snapshot of not-for-profit hospital credit strength. In the third quarter, 11 hospitals saw their Moody’s credit rating drop

Here’s where operating margins stand among independent hospitals rated by Standard & Poor’s:

• Independent hospitals with credit ratings that hover just above speculative grade (the BBB category) reported median operating margins unchanged in 2010 from 2009 of 1.6%
• Hospitals with strong credit (the A category) reported median operating margins of 2.8% in 2010 compared with 2.9% the prior year.
• Hospitals with the strongest ratings (the AA category) reported far healthier margins and an operating improvement in 2010, with median operating margins climbing to 5.1% compared with 4.8% the prior year.

Despite what the experts say, we can expect to see more operating cuts. The economy’s lapsed recovery, potential fallout from the downgrade of U.S. credit by Standard & Poor’s, and deficit-reduction efforts could prolong the economic drag on operations. Some experts have said that provisions of the health reform law will add more strain to hospital finances.

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