Forget Reform, Stay Focused on the Short-Term

HealthLeaders Media Staff, July 20, 2009

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.

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