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Mixed Financial Messages

Predicting how hospitals will fare financially over the next year is tough. So tough that one company that makes a living forecasting such things doesn't necessarily agree with itself. That's Moody's Investors Service, whose ratings are watched by investors considering myriad healthcare investments. Two recent reports try to shine a light on this murky prognostication business-for hospitals, at least.

In short, Moody's expects the for-profit hospital business to remain stable, but that decreasing volumes and increasing exposure to bad debt expense will continue to pressure margins. So-called "event-driven" shocks to the market will be minimal given the huge relative volume of deals that have taken place over the first half to three quarters of the year. On the flip side, Moody's says that while financial measures for nonprofit hospitals remain at historical highs, "the tide appears to be turning."

Hmm. Confused yet? Me too. But dig a little deeper, and it begins to make more sense.

On the for-profit side, perhaps we're looking at a breath-catching break after the fast pace of deal-making in the first half of 2007. While bad debt expense shows no sign of slowing as consumers bear more of the burden for their healthcare, for-profit hospitals took advantage of easy credit in the first half of the year to consolidate and make significant capital investments. Meanwhile, they continue to face competition from multiple low-cost providers. But are they investing to meet that competition? Perhaps.

In 2006, for example, for the first time in many years, the nonprofit sector's median expense growth rate outpaced the median revenue growth rate, and hospitals' debt levels have increased relative to debt service and debt-to-cash flow measures. However, financial performance at most hospitals remains well above historical levels, perhaps suggesting that hospitals are making hay while the sun is shining by borrowing to invest in new facilities and business ventures. And yes, running a nonprofit hospital is analogous to running a business--a complicated one that requires making a profit, even though most hospital leaders want to call it "margin" instead.

Whatever. The key question may be whether hospitals can adapt to a business model that continues to take lower-acuity procedures and services out of the main hospital. Should they continue to try to be all things to all people or focus on what they're best at? Time will tell, but bigger systems seem well-equipped to meet this challenge, should these borrowing statistics bear out that they are striving for lower cost and better quality by investing in new facilities.

If it turns out that hospitals are making wise investment decisions in the face of an ever-growing array of competitors, the world will, with apologies to our 16th president, little note nor long remember this slight downturn in its prospects.

-Philip Betbeze