Forget Reform, Stay Focused on the Short-Term

The more years I accumulate as a healthcare reporter, the more I admire the hospital C-suite's doggedness to take on challenge after challenge while providing better care with less money. Of course, in business outside of healthcare, there is the normal ebb and flow of financial success. But, in healthcare, hospitals have had a lot more ebb than flow, experiencing a string of difficulties that have eroded profitability.

When I first began my reporting career, the Balanced Budget Act of 1997's negative impact on reimbursement was a huge focus throughout the industry. Since then, hospitals have endured increased regulatory action, on top of myriad issues, such as, most recently, the struggling economy. Now, the BBA will most likely be bookended by comprehensive reform that pretty much guarantees that the reimbursement trajectory will continue on the downward slope.

While, it is easy, like the rest of the nation, to become consumed by what happens in Washington day to day, numerous other issues are more likely to affect hospital profitability in the near-term than a reform bill, such as Medicare inpatient payment rate updates.

In this week's Finance forum, Scott Clay, senior principal at Noblis Health Innovation, points out that with Medicare being the single, largest payer to hospitals, any rate change, especially in inpatient payments, can significantly affect revenue. The 2010 inpatient prospective payment system proposed rule published in May, says Clay, could result in a total estimated reduction of -0.5%.

"One year of flat or slightly negative updates from Medicare would be difficult but not devastating for hospitals," says Clay. However, he adds, included in the comments for the proposed 2010 update, CMS indicated a need for an additional 6.6% of negative adjustments over the next two years, resulting in a total three-year reduction of 8.5%. "The inescapable implication of these trends is that hospitals will need to focus in the short term on continuing the work of reducing their underlying cost structure," he notes.

Not only that, hospital ratings, or, rather the reasons behind them, are another short-term problem. A rating downgrade has the more immediate ramification of less access to capital or access to capital that is more expensive. According to the July 2009 quarterly rating report from Moody's Investor's Service, Q2 2009 was the third consecutive quarter in which nonprofit hospital downgrades exceeded upgrades at 17 to four, respectively. Out of the 17, two large regional hospital systems and one multi-state system received downgrades as the result of weak financial performance and a decline in liquidity, according to the report's authors. Moreover, twice as many outlooks went in the negative direction. A total of $4.6 billion of debt was downgraded vs. $733 million in upgraded debt.

This news was eclipsed in the headlines last week by healthcare reform legislation introduced in the House and Senate. However, as hospitals struggle to reduce costs and increase their liquidity, pressure from rating agencies is more likely to affect the bottom line in the near term than a reform package from Washington, which may take several years to be rolled out.

In Moody's April 2009 Not-For-Profit Healthcare Rating Roadmap report, analysts said they expected "all rated hospitals to report weaker financial performance in 2009," due to higher unemployment and restricted access to capital among other issues. The report's authors issued 14 red flags that could trigger a rating review, including decline in total operating revenue, a 30% decline in operating cash flow, and an unexpected increase in debt. One analyst I spoke to recently said Moody's is doing an enhanced analysis of liquidity of nonprofit hospitals and peeling back the layers to understand what is cash vs. what is liquidity.

So, it seems that while Washington threatens to overhaul the entire healthcare system by October, healthcare leaders know that one of the most important activities they can do today is find ways to trim excess fat, and build cash reserves to brace for both the near and long-term financial hits.