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Moody's, S&P: For-Profit Hospitals' Outlook Stable

 |  By John Commins  
   March 07, 2013

Despite looming 2% Medicare reimbursement cuts and other threats to the bottom line, two bond rating agencies this week issued a stable outlook for the nation's for-profit hospital sector in 2013.

Moody's Investors Service said its stable outlook reflects expectations for modest earnings growth over the next 12-18 months given the headwinds facing the sector.

"We expect same facility aggregate (Earnings Before Interest, Taxes, Depreciation and Amortization) to rise by around 0% to .5% in the next year or so," Dean Diaz, Moody's vice president and senior credit officer, said in a media release.

"EBITDA growth in 2013 will be difficult, but resume in 2014 as coverage expands. Weak admissions, a decline in the number of patients with high-paying commercial insurance and increasing bad debt expense are all currently constraining earnings."

Meanwhile, Standard & Poor's Rating Service said this week it plans to take no immediate ratings actions on the 2% Medicare cuts mandated by sequestration that took effect on March 1.

"Reimbursement risk is one of the most important credit factors in our analysis of healthcare companies that rely on third-party sources of revenue," S&P analyst David Peknay said in prepared remarks.

Peknay says, however, that S&P also takes into consideration adjustments and efficiencies that for-profit hospitals are making to reduce costs, find new revenue sources, and identify new business lines in the face of lowered reimbursements.

"The majority of our ratings allow for some variability in results, and so we do not anticipate rating changes as a result of the Medicare cut," Peknay said.

Moody's Diaz says weak patient volumes will continue throughout 2013 as people who lost their health insurance in the down economy or those who must pay a larger portion of their medical expenses put off elective care.

Reimbursement rates also are expected to remain under pressure with the decline in growth of revenue from patients with commercial plans as a percentage of total revenue, owing to the sector-wide move to more outpatient services.

However, expanded health insurance coverage under the Patient Protection and Affordable Care Act in 2014 should spark modest EBITDA growth. "Volumes and pricing should see more positive momentum in 2014, as the provisions of the PPACA start to kick in, including, most importantly, the expansion of coverage to approximately 27 million individuals currently without insurance," Diaz said.

The mandated 2% sequestration cuts to Medicare will remain a "wild card" for for-profit hospitals. The cuts took effect on March 1 but they could be repealed if Congress and the Obama administration agree on some sort of compromise. If they can't make a deal, EBITDA will sag in 2013, Diaz said.

In the coming months, for-profit hospitals will focus on controlling medical device and drugs costs. Uncompensated care costs should decline as the number of insured increases next year.

Until then, Diaz says, margins will be tight as hospitals by other hospitals, hire more physicians and buy their practices, all of which will dilute margins in the short term.

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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