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Healthcare Reform: Moody's Report Indicates Hospitals May Take It on the Chin

Karen Minich-Pourshadi, for HealthLeaders Media, May 3, 2010

Many a boxer has been able to dance around the ring again after a solid first blow. They may cough and sputter but they get moving; they put their fists up and they prepare to block and punch. It's when that second blow is delivered so close to the first that it can flatten all but a few prize-winning fighters. This recession has been a fight for most people and businesses. However, it seems the healthcare system in particular is taking a one-two punch. First, there was the variable bond market disaster, which nearly bankrupted many facilities (Pow!), then there was the healthcare reform act (Wham!).

The worst part is yet to come; most facilities haven't felt the sting of the second hit yet. Right now the fist is just in motion, so there is some time for you to still dodge, weave and block—unfortunately a few hospitals are going to take this one on the chin, as surmised by a recent Moody's Investors Service special comment, "Long-term Credit Challenges of Healthcare Reform Outweigh Benefits for Not-for-Profit Hospitals."

Here are a few of the problems Moody's anticipates for not-for-profit hospitals as Healthcare Reform takes effect in the next few years:

  • "The ultimate credit effect . . . will be negative despite reduced bad debt expense and charity care provided by expanded insurance coverage for previously uninsured patients.
  • The key longer-term challenge for not-for-profit hospitals is the reform's reliance on extracting long-term cost efficiencies from hospitals, probably resulting in diminished hospital revenues. The trend will become more pronounced over time as key provisions of the law do not become effective until 2014.
  • The effects will include more difficult negotiations with private health insurers due to increasing regulatory scrutiny of the insurers by federal regulators. Hospitals also will face reimbursement pressures from government payers as the reform includes provisions that squeeze savings out of Medicare and Medicaid, including initiatives to identify improved operating efficiency.
  • While the most efficiently operated health systems will take advantage of healthcare reform to leverage economies of scale, many not-for-profit hospitals, especially single site and small hospital systems, may struggle. Industry consolidation resulting in bigger health systems with greater access to credit—already encouraged by current market forces – likely will increase further under healthcare reform."

While the Moody's predictions aren't particularly shocking to most CFOs, they are nonetheless disconcerting. Still, as the saying goes, "There are no problems, only solutions that haven't been found yet."

To help give financial leaders additional insights and potentially alternative outcomes of this legislation, I touched base with David Burik, managing director in the Healthcare division at Navigant Consulting, a Chicago-based, international consulting firm. Here's what he's seeing:

Charity care and bad debt
There's little question that most facilities will see a decline in both of these areas as more coverage is rolled out to Americans. But, it seems Moody's and most folks in healthcare feel it the declines won't be enough to offset the rest of the losses the healthcare may experience based on healthcare reform legislation.

"I don't see a lot of people holding out a lot of hope for this [charity care and bad debt declines] doing much to help long-term. And, . . . if they are going to use the Medicare rates for payment, they're certainly not going to use commercial rates, then it's hard to see how this will be a net gain even though some hospitals will have the highest number of enrolled with benefits," Burik says.

Long-term efficiencies
A little cut here, a little trim there, none of it will be enough to offset the potentially daunting financial future brought on by healthcare reform. Hospitals must figure out where their money is going and how to keep more of it from leaking out. Burik says for years hospitals overlooked areas that weren't generating growth or profit, preferring to weigh lay the discussion under the header of "we'll get to it sooner or later." Well, later has now arrived.

"Now I'm starting to see active discussion of these projects," he says. "Hospitals have to look at structural costs that were carried in the good times for some of these [less fruitful] areas and question whether it makes sense to continue them."

The effort to maintain the status quo, Burik explains, is often what has held facilities back from dropping some programs altogether. "Since the announcement of healthcare reform I think a lot of hospitals recognize that things are no longer the same, so you can't maintain that status quo. They have to find new ways to do business and that could be as simple as outsourcing billing or patient referral lines."

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