Not-for-Profit Provider Outlook 'Negative,' Says Moody's

The economy is still too soft to change the negative outlook for not-for-profit healthcare providers in the United States in 2012, and that outlook may stay negative "for at least the next several years," says a report from Moody's Investors Service.

The bond rating agency's healthcare group is holding firm to the negative outlook it has maintained since 2008, based largely on issues that are beyond the control of providers.

The main reasons for the continued negative outlook include modest revenue growth for hospitals over the next 18 months, an expectation of continued "softness" in the economy, and challenges created by the care, payment, and regulatory transitions mandated by the Affordable Care Act, Moody's said.

"While performance in the sector is expected to remain variable in 2012, with certain organizations performing well despite the challenges, the preponderance of credit factors facing the industry is unequivocally negative, and is expected to remain negative for at least the next several years," the report stated.

Lisa Martin, senior vice president of Moody's Healthcare Group, says that any change in the dour outlook will depend upon what happens in the larger economy.

"Some of it is going to hinge on what happens with the economic recovery because that is underlying a lot of these pressures. To the extent the economy picks up that would be a primary factor driving a more stable environment," Martin told HealthLeaders Media.  

Moody's cited several "negative factors supporting the outlook," including:

• Pressures on hospital revenues coming from a variety of sources, including Medicare, Medicaid, and commercial payers
• The myriad challenges brought on by healthcare reform, including the transition to a new care delivery model and the uncertainties that come with it, and the increase in physician employment
• The soft economy, which will continue trends in lower utilization, high unemployment, and increase reliance on charity care, self-pay, and government payers.
• Ongoing investment losses caused by volatile bond and equity markets, pension fund obligations, increased capital spending funded with cash reserves, increased exposure to non-cancelable operating leases, and negative valuation of swap portfolios. 

All is not lost, however. Moody's identified several positive trends in the sector that may someday help to restore a positive outlook. Those trends include:

• Mergers and acquisitions that generally strengthen health system balance sheets, improve efficiencies, and provide an exit strategy for bond holders
• Historically low interest rates and low expense growth
• Improved management and governance,
• Growth in state-administered provider fee programs that create short-term relief from Medicaid reimbursement cuts

Bruce McPherson, president and CEO of the Alliance for Advancing Nonprofit Health Care, says the Moody's report raises legitimate concerns, but "overall they are more negative than I am."

"I don't disagree that there are a lot of financial challenges out there," McPherson told HealthLeaders Media. "But the hospital leaders that I talk to are pretty well on top of the challenges and are making very good progress in addressing them in terms of finding additional efficiencies and ways to improve quality. It's hard for anyone right now is on the investment side. What is a safe place to invest funds and make some sort of return? That non-patient care side of it is a real guessing game."

Martin and McPherson agree that the tough economy is forcing not-for-profit providers to run lean operations, and that is a good development.

"In this environment we are seeing more of the stronger management teams focusing on a number of areas and trying to be proactive ahead of some of the pressures that are coming," Martin says. "These management teams are focusing on being more efficient."

"In order to offset some of the revenue pressures there is a lot of focus on the expense side management," Martin says. "It's what I would call the first tier of expense management, things like restructuring employee benefits, in some cases downsizing the workforce to increase productivity. It is consolidating certain vendor contracts. It's what I would classify as blocking and tackling initiatives."

Martin says some of the more advanced managed teams are creating "tier two strategies" that involve a total process redesign to improve patient admitting, processing, and billing.

"It's more of the core way the hospital operates, things like reducing length of stay and implementing technology strategies so you can collect more data and reduce the variations in practice," she says.  "There are also revenue strategies. Though in order to combat the reimbursement reductions, some are focusing on growth strategies, which can include mergers and acquisitions and also may include things like building patient outpatient centers."

McPherson says he's encouraged by the spirit of cooperation that nonprofit hospitals have undertaken during the down economy. "If there is an area that needs a new hospital or specialty program they are setting up joint ventures for those sorts of new facilities so they don't necessarily duplicate one another or staffing for specialized care because those resources are scarce," he says.

"There are other examples where folks are getting together and sharing ideas, sitting down and saying 'here is what we are doing to improve efficiency and quality. What are you doing?' I think it has turned into a much more collaborative environment," he says.