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Nonprofit Hospital Outlook 'Negative' in 2014

John Commins, for HealthLeaders Media, December 2, 2013

HLM: What are some of the real-world implications for these revenue declines?

Steingart: Certainly there are going to be hospitals closings in rural areas or the third hospital in a two-hospital town. We have plenty of those. What keeps them from closing or going bankrupt outright is mergers and acquisitions. That is the white knight that always comes along. Otherwise you would have seen a lot more hospital bankruptcies over the last few years.

What you typically see in these M&A deals, unless it is a place that was just about to fall off a cliff, the acquired hospital strikes a deal where they can maintain emergency services and a certain number of inpatient beds for three to five years or whatever and then the parent has the right to do whatever they want. You will see, to use industry jargon, more rationalization of services. In other words: the closure of departments in smaller hospitals. They will provide emergency services, physician offices, and probably nobody overnight unless it is emergency holding waiting to transfer to another facility.

HLM: Given the switch to value-based reimbursements and other reforms, is it time to reexamine how these not-for-profit hospitals are reviewed by credit rating agencies?

Steingart: I wouldn't go that far. We actually changed some of the utilization and payer mix indicators that we asked for. We are not just looking at pure volume-based ones. We are looking what percentage of contracts are fee-for-service and what percentage are alternative reimbursement models. We are looking at different data points that represent utilization, not just pure volume but the number of unique patients you are seeing in a year. That is a different way of looking at market share. We are looking at how many of your physicians you are employing and are aligned with.

I don't think we need a wholesale change in the methodology. Fee-for-service is still the predominant model, and even if we were to move to 100% capitation—when you are looking at this in the context of credit ratings—the financial metrics of debt service coverage and debt to cash flow and revenue growth still matter. One area that raises an interesting point is how does payer mix play into this? That is a part of our scorecard and methodology. Do you have to change the way you look at payer mix? I would make the argument that by collecting different data around payer mix we are setting ourselves up to adapt to that world if and when we need to make that kind of switch.

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