Moody's Gives For-profit Hospitals 'Stable' Outlook

For-profit hospitals will continue to see revenues stressed by soft volumes and pricing pressures over the next 12 to 18 months but profitability should remain healthy thanks to cost containment efforts, Moody's Investor Services said.

The credit outlook for the sector remains stable through mid-2012, but growing uncertainty surrounding pricing and demand prompted a negative bias on the outlook, Moody's said in its report: For Profit Hospitals: Profitability to Remain Healthy Despite Pressures.

"Moody's negative bias on the stable outlook for the for-profit hospital sector stems from our belief that these headwinds and additional investment in growth initiatives may make it difficult for hospitals to maintain their current margins," said Dean Diaz, a Moody's senior credit officer.

The expectation that weak hospital admissions trends will not worsen over the next 18 months provides some stability to for-profit hospitals, Diaz said.

Also tempering Moody's stable sector outlooks is its belief that consumers' overall use of medical services will be lower than otherwise would have been expected due to changes in health benefit plans and greater cost shifting to employees.

Longer term, however, demographics, healthcare reform legislation and the introduction of new technologies will help drive growth in demand for both hospital services and medical devices.

Moody's rated the median profit margin of for-profit hospitals at about 15%.

•  Investments that hospitals are making to foster future growth could also compress margins in the near term. These include upgrading information technology and aligning with physicians in a bid to boost patient referrals.
• Growth in adjusted admissions will likely remain weak as the uninsured or people whose premiums and co-pays have risen continue to defer non-urgent care. Birth rates, and related hospital admissions, have also declined amid high unemployment and economic sluggishness. This trend will likely continue constraining volume growth.
•  Pressure on pricing should continue as commercial insurers resist payment increases and Medicare reimbursements fall.
• Longer-term factors should support demand for hospital services, including the aging baby boomers and consumers' increased access to healthcare through the 2010 industry reform package.