OREANDA-NEWS. A group of the largest U.S. for-profit hospital companies reported an average of 2% growth in organic patient volumes in third-quarter 2015 (3Q15). Companies demonstrated little pull-through of this volume growth to operating margins, which is a reversal from the last few quarters when margins were up strongly year over year. According to a new Fitch Ratings report, during 3Q15, the group's average operating EBITDA margin was up only 16 basis points versus 3Q14, and some companies reported a steep drop in same hospital margins. Higher labor and supplies expenses and relatively weaker growth in pricing played a role in these results.

Although some of these headwinds to profitability appear to be transient, Fitch largely expects margins for this group of companies to remain under pressure in 2016. Some companies reported that a higher level of uncompensated care was a headwind to margins in the quarter. The benefits of the Affordable Care Act (ACA) for acute care hospitals ramped up in early 2015, and the short operating history under the legislation makes it difficult to tell how much of the uptick in uncompensated care is related to a tapering of its benefits. However, concerns regarding the commercial viability of the public health insurance exchanges, and stalled progress of expansion of state Medicaid programs indicate that the benefit may be slow to accelerate in the coming year.

Presidential election-cycle politicking and ACA-related news flow will influence equity prices and capital deployment priorities for hospital companies throughout 2016. Leverage for some companies remains quite elevated from recent acquisitions. Good operating cash flow generation and proceeds from asset sales will provide an opportunity to pay down debt over the next several quarters. However, it appears more likely cash will be directed to acquisitions and share repurchases. Therefore, while most companies have some headroom under negative rating triggers, upward rating momentum in 2016 will likely be constrained by capital deployment decisions.