NFP Hospitals' Outlook Upgraded to 'Stable'

Not-for-profit hospitals have emerged from the recession as leaner and better-managed organizations poised to take advantage of an improving economy, says a Moody's Investors Service analyst.

The financial outlook for not-for-profit hospitals has been revised from "negative" to "stable" by Moody's Investors Service, the bond rating agency's first upgrade for the sector since 2008.

"The outlook revision represents significant gains in the number of people with insurance, growing patient volumes and sizeable reductions in bad debt that are contributing to very strong growth in operating cash flow," Moody's said in its analysis.

"The stable outlook expresses our view that fundamental business, financial, and economic conditions for the not-for-profit and public healthcare sector will neither erode significantly nor improve materially over the next 12 to 18 months."

After two years of flat cash growth, Moody's survey of about 200 not-for-profit hospitals saw operating cash flow growth spike to 12.3% in 2014, up from 0.3% in 2013. Through March of this year, cash flow growth stands at 11.5%. However, that growth is expected to taper off through 2016.

In addition, bad debt was down about 15% in Medicaid expansion states, and down about 4% in non-expansion states.

Daniel Steingart, an analyst and senior vice president at Moody's, says not-for-profit hospitals have emerged from the recession as leaner and better-managed organizations that are poised to take advantage of an improving economy.

"Just as there had been perfect storms over the past several years that had conspired to keep cash flow growth down and to keep overall performance lower than it had been and declining over previous years, you are seeing a bounce back," Steingart says.

"It's a strong performance that we are in the midst of. Some is the generally improving conditions and some of it is the reversion to the mean after some very poor years."
 
"You have volume growth picking up because of deferred care, and gains in insurance coverage—a portion of which is the economy, a portion of which is Obamacare—and then you also had at the latter end of last year continuing into 2015 some real pick up in overall volumes, not just this pent up demand."

While the Patient Protection and Affordable Care Act was a factor in the not-for-profit hospital sector upgrade, Steinhart says he "would not pin it all on Obamacare."

"If it were simply that, you would see a much bigger difference between the Medicaid expansions and non-expansion states. The reality is everyone has improved," he says. "Yes, there were health insurance exchanges in Texas and Florida and more people gained coverage in those states, but the biggest gains were in Medicaid populations and that didn't happen in those states. I'm not saying Obamacare had no impact. It clearly did. Bad debt coming down has had a positive impact. But it is not the entire story."

Steingart says that the outlook could upgrade to "positive" if the operating environment improves and allows for stronger cash flow. If cash flow is below medical inflation, however, the outlook could be downgraded to "negative."

Either way, Steingart says hospitals should not expect that the level of volume growth they are now seeing will continue.

"It is not a return to the go-go years of the early 2000s," he says.

He says hospitals will also have to contend with rising labor costs.

"A lot of hospitals have been keeping the belt very tight," he says. "Even though there have been a lot of job gains in the sector, a lot of hospitals are telling us they are holding tight on salary and benefits. Wage pressure is going to be an issue over the next six months or so."

Beyond the 18-month forecasting window, Steingart says not-for-profit hospitals face potential bottom-line challenges in the movement toward population health and value-based care that are expected to reduce in-patient days. In addition, information technology upgrades, strategic investments in physician practices, and the growing shift of coverage toward Medicare as the population ages, also will squeeze bottom lines.