Moody's Still Bearish on Not-for-Profit Hospitals

For the fifth consecutive year, Moody's Investors Service has issued a negative credit outlook for the nation's not-for-profit hospitals in 2013, with revenue growth expected to continue for the sector but margins getting leaner.

The sector hasn't been stable since at least 2008, and Daniel Steingart, a Moody's Assistant Vice President and analyst, says there is no indication that anything is going to change for the better anytime soon.

"I don't want to say that this is the ‘new normal' but there is so much uncertainty out there and the balance of the factors we see are negative," Steingart told HealthLeaders Media. "We need some more clarity around some of those items and see them hopefully resolved in a more favorable light to go back to a stable outlook."

Those items include the likelihood that the federal government will trim reimbursements for Medicare and other healthcare spending in the name of deficit reduction, and that tepid economic growth and related elevated unemployment levels will dampen demand for healthcare services.

Hospitals already face more than $300 billion in reductions to Medicare through 2019 as part of healthcare reform. Steingart says additional cuts to hospitals will likely be part of any legislation intended to reduce the long-term federal deficit.

"There is a lot of uncertainty about where Medicare rates are going to go," Steingart says. "Our view is that, whatever legislation that comes out dealing with the federal deficit, both sides want to cut Medicare in some form or another. Right now they may be far apart in their proposals but they are both proposing some sort of cut."

"There is a lot of uncertainty as to regulations the Obama administration is still rolling out with the health insurance exchanges, what sort of insurance products will be on them, how they are going to reimburse hospitals. Our feeling is that they are going to reimburse at lower rates than the typical commercial insurance that you and I might have. But there is a lot of uncertainty about where those rates will be and how many people will sign up for them."

As dour as the outlook may be for 2013, Steingart says there is nothing now to suggest that it will be any better in 2014 when key provisions of the Affordable Care Act take effect.

"Everybody seems to be fairly confused about what it means to participate in the health insurance exchanges," he says. "The insurers are worried that the relatively healthy won't sign up for insurance, paying the penalty and then signing up as soon as they have a condition. There is a lot of uncertainty about what kinds of products will sell best on the exchanges."

"So when we are sitting here next January there is still going to be a lot of uncertainty, but as 2014 unfolds we should have more clarity about how many people have signed up for insurance and what the Medicaid rolls are looking like in each state," he says.

"We expect that the hospital Medicaid payer mix will go up, but you won't start to see that in the numbers until maybe the first quarter of 2014, and you'll see it in audits for those with June 30 year-end. But you're talking about a six month lag before we really start to see it."

Steingart says that Moody's adjust its analyses and outlooks to consider the changes in the healthcare market but that those adjustments can only go so far.

"We are looking at broader measures of utilization, but at the end of the day revenue growth is still a key factor for us in part because expense growth and healthcare inflation are generally very high," he says. "So keeping up top-line revenue growth is key for us. When you look at hospitals across the country it is very unusual to have a year where revenue is flat from one year to the next and very, very rare to have actual negative revenue growth."

Admissions will continue to be a key measure for hospitals, Steingart says, even though healthcare reform designs care coordination and incentives around keeping people out of hospitals.

"We used to only list admissions and now we list observation stays and admissions as an indicator of demand for hospital services," he says.

"We're looking at the whole picture. We're looking at physician office visits and ED visits. To some extent we are moving beyond that pure in-patient view of demand. But, you have to keep in mind that market share—which there is a whole cottage industry around tracking and measuring—is still largely inpatient based. It is still very hard to get good comparable data on an outpatient basis."

It's not all bad news, however. Steingart says hospital administrators have improved operations and efficiencies in the face of weaker patient volumes and slower revenue growth. The accelerated growth of mergers, acquisitions, joint operating agreements, and other collaboratives have helped hospitals improve on economies of scale, leveraged market share, and other efficiencies.

"What management teams have been effective in doing is increasing productivity at a broad level, cutting expenses in departments where revenue growth hasn't been that good, managing down the number of people needed to staff a unit. Hospitals have gotten very good about doing that. But that is all in the context of fee-for-service and reducing your unit costs to match the amount you are being paid," Steingart says.

"What we need to see is this deeper dive on the expense cuts, which is managing the whole patient through-put and patient care experience to how the reimbursement contracts change," he says. "Right now that is very fluid. That is going to be a challenging area. What you are seeing is the larger systems and the better teams are experimenting with that on certain care protocols."

For example, Steingart says some more advanced health systems offer what amounts to a warranty on procedures such as hip replacement surgeries.

"They have done a very deep dive on what it takes to admit a patient, the services they utilize when they are in the hospital, all the care providers that touch that patient during their stay, and the post-acute follow up and rehab and they are trying to value engineer that," he says.

"Right now we are at the beginnings of that. You only have it with a few services from a few really good and advanced institutions. That is something that is going to have to trickle down to the rest of the industry because the payment changes are going to come over the next two are three years."