Moody's Predicts More Bad News For Nonprofit Hospitals

Cheryl Clark, May 18, 2010

Non-profit hospital chiefs who think they've been dragged through the wringer with the credit crunch and the recession should not think the worst is over, according to a new Moody's Investor Service report, which could be summed up in short:

Brace yourselves for more bad news and changes for many years ahead.

"The degree of change facing hospitals under healthcare reform and other industry structural shifts is even more fundamental" than the change hospitals experienced with the DRG payment transition in the 1980s, Moody's says, "touching all aspects of hospital operations and capital strategies."

For starters, even though healthcare reform policies are expected to reduce hospitals' burden on uncompensated patients, Moody's predicts "tighter reimbursement from all payers."

Here are several trends outlined in the report, "Transforming Not-For-Profit Healthcare in the Era of Reform."

  • For Medicare, rate increases are expected to be minimal for the fiscal year starting this October, and over the long-term, will be cut more as federal budget pressures continue and Medicare insolvency looms.
  • For Medicaid, many states have reduced benefits and that trend is expected to continue because of the decline in tax revenues.
  • For commercial insurance, Moody's predicts tougher negotiations with health plans and declines in rate increases, especially as the health plan industry consolidates "to gain more leverage over hospitals."
  • Many hospitals will have to look to mergers and acquisitions or joint ventures with physician-owned surgery or imaging centers, and many hospitals are looking for models to employ more physicians.
  • Smaller hospitals have been more likely to experience credit downgrades, a trend that may continue.

There are some upsides, however, if hospitals take action to streamline systems and are diligent in looking ahead, the Moody's report suggests.

Alignment and consolidation may lead to greater pricing leverage, "moving the hospital toward the goal of being a 'price-setter' rather than a 'price-taker.'"

There may be greater revenue from centralizing office functions and consolidating support services. And hospitals may be able to increase outpatient revenues, with higher returns and margins, with smart growth strategies for ambulatory care.

One area outlined in the report is the investment required for information technology to achieve health reform goals of improving quality and reducing cost.

"Healthcare reform will effectively change hospital reimbursement from episode-based care to a methodology based on clinical outcomes and cost (which) . . . will become much more transparent, allowing patients to select where they want their hospital treatments."

The report suggests hospitals engage in specific strategies to blunt the blow, such as greater training of middle management and future leaders, increasing benchmarking of best practices, better education of board members about reform, and greater participation on boards and board committees by experts in finance, technology, legal, and investment.

Also, the report suggests that hospitals more judiciously use and oversee external consultants, do a better job of scrutinizing debt structure, bank agreements and derivative products, and engage in more cost reduction strategies that can be implemented quickly.

In summary, Moody's predicts "growth strategies, physician alignment and greater efficiencies, along with effective management and governance, will be integral in positioning the organization for payment reform."

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