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Is the Other Economic Shoe Going to Drop in Healthcare?

 |  By HealthLeaders Media Staff  
   December 07, 2009

My husband is a doctor who has owned his own practice for several years. In the time I've known him, I've watched him toil over his balance sheets, ponder marketing campaigns, and read up on growth opportunities. I've also heard sad tales of how his long-time patients have lost their jobs, their insurance, and even their houses and in this economy, his patient's woes translate into his practice's ones.

My husband isn't running a large, 900-bed facility with hundreds of employees, but the problems he faces are very similar to the ones hospital CFOs face too—how to keep the business going and still help people. Unquestionably, it's difficult to focus on the latter when you are doing everything you can to keep your books in the black and seemingly every outside agency is working against you. And there are many, myself included, who wonder if the other economic shoe is going to drop in healthcare—and a "W" or double-dip recession will smack us over the heads.

I was speaking to a CFO this week who made a few remarks that really resonated with me. He was pondering the possibility of the economic double dip and the ramifications it would have for hospitals with large Medicare patients who have been cost cutting to stay afloat. He remarked, "You can't cut yourself to prosperity." How true it is.

Interestingly Fox News interviewed President Obama in late November and he explained that if the nation keeps adding to deficit spending through tax cuts or more stimulus spending, eventually people could lose confidence in the U.S. economy and that could "lead to a double-dip recession."

Cutting costs isn't the way to get out of a recession, and financial leaders know it; the only way out is to grow. You can grow two ways: (1) by hiring physicians and other top staff, and (2) expanding your facilities. We know employment is up at hospitals nationwide. The healthcare sector reported 21,000 payroll additions in November, according to U.S. Bureau of Labor Statistics, and 613,000 payroll additions since the start of the recession in December 2007. The healthcare sector has created 249,700 new jobs in the first 11 months of 2009, an average of 22,700 new jobs each month, the BLS reported. So, it seems CFOs are working on growth opportunity number one.

Then there's the second path, building. Unfortunately growth via this avenue has been hindered by the bond market. The government tried to come to the rescue with a new program that allows hospitals to essentially triple the amount of bank-qualified bonds they may sell per year. The American Recovery and Reinvestment Act of 2009 added a temporary provision allowing nonprofit hospitals and other 501(c)(3) organizations to sell up to $30 million in tax-exempt, bank-qualified bonds in a single calendar year. Notice that this is a temporary provision. It expires December 2010, which gives hospitals just about a year to get this area of their finances squared away.

Unfortunately, having a great deal of outstanding debt, and too much of it tied to variable rate bonds, is likely to have a negative affect on your investor's credit rating, making it more difficult to get the new loans needed to build. However, assuming a facility can get new bonds secured, hospitals can begin the process of building and/or renovating, which means more space, and therefore (ideally), more patients and a larger market share. What does this all have to do with a double-dip in the economy?

Growth isn't easy for any business, but what makes it more complex is the unknowns that can disrupt the best laid plans. You may have missed it the week of Thanksgiving, but Moody's released a three-page sector comment called U.S. Health Care Reform: Credit Threat for High Cost Urban Hospitals. This Moody's sector comment noted:

"Both [House and Senate healthcare reform] bills highlight the conflicting goals of healthcare reform: (1) expanding the number of insured patients—while (2) restraining future healthcare costs. Achievement of these goals will affect hospitals in different ways, but cost control measures could be especially negative for the credit position of many high-cost urban hospitals even if the number of insured patients expands," the report noted.

The Moody's piece goes on to explain, "The drive to control costs is fueled by rising Medicare costs, as well as by research such as that conducted by Dartmouth College, which has published an 'atlas' of differing medical practices and costs by 306 Hospital Referral Regions (HRR) across the United States."

Moody's rates more than 50 hospitals or hospital systems that operate in the regions listed in the Dartmouth College study, and 17 of those they rate are among the highest cost HRR; 16 of which are in urban or densely developed markets (only one is in a rural area). Now if Medicare cuts do pass, regardless of the reasons for the high disparity in Medicare reimbursements, those hospitals will feel it in the financials and that includes investment service rating downgrades, the Moody's report noted.

"There are a lot of moving parts in healthcare reform that go beyond the current legislation in the House and Senate version," says Mark Pascaris, vice president and senior analyst for the healthcare ratings team at Moody's Investors Service. "If efforts aren't taken to reduce the variability of Medicare spending by market, those hospitals in the higher Medicare reimbursing regions could ultimately be affected."

In these high HRR regions, the best positioned hospitals according to Moody's are likely to have two characteristics: 1) those that are part of multi-state systems that can rely on broader economies of scale and can import cost-efficiency practices from outside of their local region, and 2) those that gain the most new paying patients who are newly covered by health insurance. The most vulnerable hospitals will be stand-alone hospitals dependent on high-cost referral practices and which do not gain many new paying patients.

So those systems that manage cost reduction and find growth opportunities will succeed. It seems like such a simple equation and yet it is so difficult to enact. If the rest of the economy continues to lag in the recovery, then growth may continue to elude healthcare facilities. Plus, if Medicare cuts go through that may ultimately leads to more cost reductions at hospitals.

But we already know you can't "cut yourself to prosperity," eventually you will run out of areas to trim. That's when things won't look so good. And that's why I wonder if a "W" is on its way. Even if a double-dip bypasses the national economy, depending on what happens with healthcare legislation, it very well could still hit many hospitals nationwide.

The best a CFO can do is try to apply the principles of cost reduction and growth to the best of their ability. If it's any consolation, Moody's released another report last week indicating that the Investor's Service upgraded ratings on 20 nonprofits this year. So getting out from under the red ink is possible, and some hospitals are doing it.


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