A ratings agency leader sounds the alarm for not-for-profit hospitals, saying they "have begun to lose the battle" and that a host of negative trends warrants a credit downgrade.
Last week at the Healthcare Financial Management Association's ANI conference in Las Vegas, Martin Arrick, managing director in the corporate and government ratings group at Standard & Poor's, spoke about the ratings agency's recent downgrade of the not-for-hospital sector's two-year credit outlook to negative, after being stable for years.
While NFP hospitals have done well in reducing costs over the past several years, they simply can't keep pace with the current array of financial challenges they are facing, Arrick says.
"My view is that the sector has done a phenomenal job keeping up with all the changes since the recession," he says. "Since 2008, the hospital CFOs that I know have really spent a lot of time trying to take control of what is going on within their organizations and have led the journey to cut costs and lower capital spending. They have been able to meet the challenges of a much tighter revenue environment. For the past few years things have been relatively stable even as the noise in the sector has gone up.
"Over the last year, though, a lot of not-for-profit organizations have begun to lose the battle. Essentially, it comes down to the idea that these organizations' ability to cut costs has been eclipsed by revenue pressures."
Arrick discussed six key areas that are creating a difficult credit environment for NFP hospitals.
1. Declining utilization
As hospitals improve quality and outcomes, they are driving down their own utilization rates, Arrick says.
"One of the big contributors to the ongoing pressures we are seeing is the decline in use rates. A lot of that goes back to hospitals doing a better job delivering care, and that is going to reduce their use rates over time," he says.
He believes that high-deductible health plans will continue to put downward pressure on utilization because "folks have more and more of their own dollars at play. People don't want to spend their own dollars and are becoming a lot more cost-conscious. Price consciousness among the insured is really at the beginning state, and as it grows, it will only be harder for folks in hospitals."
Utilization rates may go up as more people become insured through the health insurance exchanges and Medicaid expansion, but Arrick said this trend will be short-lived and is not enough to offset the current pattern of declining healthcare consumption in the long run.
"All of a sudden we've had a big boom with the ACA, and all indications are that the number of uninsured is dropping. … I think we are going to see a big bump in volume as these folks now have insurance cards, but I think this will be a short-term bump up in volume, while the long-term trend line is going to go down."
2. Increased competition
NFP hospitals are searching for ways to increase market share as utilization drops, and most are trying to expand their service area footprint, which is creating aggressive competition in most markets, Arrick says.
"There is more competition for patients, and as the number of inpatients goes down, hospitals are beginning to compete in different ways and are trying to expand their geography," he says.
"They need bigger feeder networks, whether they go out and acquire them or they enter into affiliations. We are seeing larger systems going out further from their home base to try to bring in more patients. Everybody is trying to enlarge the funnel to get key cases to come to the home office, so to speak. Obviously, not everyone can win at that game."
3. Pressure on capital and operating budgets
As the need for investment in brick and mortar assets declines, hospitals are turning their attention to their IT capabilities. The financial outlays are enormous, yet efficiency gains from IT will be elusive, Arrick says. "A lot of money is going into IT, so that is both capital dollars and operating dollars, and not every IT install goes well," he says. "Once IT is up and running, that does offer benefits both in finding ways to cut expenses further and also in finding best practices and disseminating them more quickly. However, best practices are going to reduce complications and reduce admissions and readmission, so improving these [quality measures] is going to impact finances."
4. Observation status
The Centers for Medicare & Medicaid Services is putting a heavier burden on hospitals to prove medical necessity for inpatient stays through RAC audits and the eventual implementation of the two-midnight rule, and providers are feeling the financial pinch. CMS reimburses at a much lower rate for observation status patients, even though the cost of providing care remains the same as for inpatients.
"Observation care might be the right thing for the patient, and I think most hospitals want to do the right thing for their patients, but on the financial side is where they get hurt in the process," Arrick says. "You can end up shooting yourself in the foot while you are doing the right thing."
5. Defined contribution health benefits
Many employers will move to a defined contribution health benefit for their workforce, in which they will give people a set amount of money and send them to the private health insurance exchanges to shop for health coverage, Arrick says. This trend will further encourage the growth of high-deductible health plans as people try to keep their premiums low.
"There is a real movement to defined contribution health plans by employers. That is a national movement. We haven't seen it in huge numbers yet, but there is a real sense that this is where we are going to go in five or ten years," he says.
6. State budget concerns
States that have chosen to expand Medicaid are going to feel the pressure of what Arrick calls the "woodwork effect" of people who would have qualified for Medicaid before the expansion of eligibility guidelines.
"A lot of folks who would otherwise have qualified for Medicaid are showing up, and the feds are not paying for them at 100%. The feds are covering them at traditional rates," he says. "All of these folks are coming out of the woodwork now because of the focus on healthcare coverage."
The problem for hospitals, Arrick says, is that having Medicaid coverage will encourage people to access services, which puts collections in jeopardy if a state has to make budget cuts.
"As we all know, when the economy takes a downturn, one of the first places states look to cut is Medicaid."