Warning Signs

Philip Betbeze, for HealthLeaders Media, September 15, 2008

I'm getting a steady stream of bad tidings across my e-mail account lately concerning the growing headwinds facing hospitals in these United States. You might rightly wonder where these analysts have been the past few years as hospitals have struggled with growing bad debt expense and pressure from the uninsured, but I think a general good feeling existed because hospitals had historically easy access to capital in the run-up to the credit crisis, masking some of the operational challenges coming down the pike—such as consumer-directed healthcare, which is now magnifying the collection woes hospitals once blamed on the uninsured.

It's a tough market to stay ahead of, analysis-wise. On the one hand, healthcare in general—and hospitals in particular—are dealing with some of the same headwinds the rest of us are facing. Higher gas prices, inflation, rising wage pressures. Conflicting headlines render the financial future of healthcare uncertain. With the lack of a clear financial direction for the industry as a whole, I thought it might be helpful to check some of the recent headlines, good and bad, and what they portend for the healthcare industry.

Numbers of the uninsured are dropping

The U.S. Census Bureau says the number of uninsured are dropping, from approximately 47 million in 2006 to an estimated 45.7 million in 2007, which represents a decline from 15.8% uninsured in 2007 to 15.3% in 2008. Many sources I talk to don't really believe those numbers are accurate, but as long as the survey methodology doesn't change, the data can effectively show trends, and a half-percent drop in the uninsured is nothing to sneeze at.

Effect: Positive

Pressures mounting on hospitals

Moody's Investors Service sent out a report a couple weeks back that sounded an alarm for operating pressures on hospitals. Based on audited 2007 financial statements for 410 free-standing hospitals, those pressures are resulting in a slower revenue growth rate. Further, revenue is growing slower than expenses. According to the report, median annual expense growth declined to 7.4% in FY 2007 from 7.8% in FY 2006, while the median operating revenue growth rate decreased to 7.2% in FY 2007 from 7.3% in FY 2006. The positive kernel to be taken from the report, though, is that hospitals are reducing their expense growth far faster than the revenue growth rate.

Effect: Negative

Credit quality slipping

Another major rating agency sees dark clouds on the horizon for hospitals as financial metrics for the hospitals they rate have declined in recent months. "We expect the number of downgrades to exceed upgrades for the rest of 2008 and probably in 2009, as business and financial challenges squeeze operating margins and weaken balance sheets," Standard & Poor's credit analyst Martin Arrick says. However, even that report doesn't paint a clear picture, as Arrick expects a rich-get-richer trend to intensify in nonprofit healthcare. The stronger credits are doing quite well, while smaller and already lower-rated credits are struggling more mightily.

Effect: Negative

So take these sometimes-conflicting pieces of news for the picture they paint—a broad, macro view of the state of the healthcare industry. Of course, your experience in your own market may be much different. That's where the devil is in the details when you're trying to analyze the health of the industry, as I am. I'd love to hear your individual challenges or success stories, so please don't hesitate to contact me. Who knows, I might even write a story about it.

P.S. Be sure to check out our Top Leadership Teams event coming up this October in Chicago. I know travel is getting expensive, but if you only go to one event this year, this is the one, and I’m not just saying that because HealthLeaders signs my paycheck every two weeks. We’ve got a two-day agenda packed with some of the top leaders in healthcare today, and they’ll be revealing their operational secrets in a series of panels over the course of the conference. Compare this lineup with any of the shows that feature vendors yammering at you to buy their products, and I think you’ll agree with me. 

Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.
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