Despite the positive news from a Thomson Reuters study last week, which found that hospital margins had rebounded in the first quarter of 2009, the troubles of the last 12 months may not be behind anyone just yet. Moody's Investors Service for one, doesn't hold out much hope for a strong financial performance for either the for-profit or the nonprofit hospital sectors in the coming months given that the business climate is likely to remain weak. In a report released last week from the credit rating agency, Moody's analysts say the outlook for both the for-profit and nonprofit hospital sectors is expected to remain negative over the next 12 to 18 months.
The report: "U.S. For-Profit Hospitals Face Further Uncertainty" focuses primarily on the for-profit sector. It finds that while for-profit hospital companies posted strong financial results along with improved credit metrics in the first half of 2009, there are just too many other factors going against them that will likely drive up costs, cause volumes to remain flat, and push down reimbursement from both government and commercial payers.
"The main drivers for us are the expectation that volume growth will continue to be challenging, uncompensated costs are likely to increase, and pricing growth is not likely to be sustainable at the levels we have seen in the past," says Moody's vice president and senior credit officer, Dean Diaz.
The report's conclusions are somewhat puzzling because in July, Moody's issued a report saying that uninsured volume and uncompensated care costs have been relatively flat since March 2008 for investor-owned hospitals. But analysts attributed that blip to the COBRA stimulus subsidy, as well as to an effort by hospitals to qualify more patients for financial assistance.
At any rate, recent improvements in for-profit hospitals' operating performance are not sustainable, say analysts, namely because we are at a 26-year high for unemployment. This of course will ripple across the industry, causing the number of people without insurance to rise, followed by an increase in uncompensated care costs. Further, the stimulus money, which helped subsidize COBRA, may not continue to hold down costs because it is only a temporary fix.
Diaz says volumes and uncompensated care are more broadly influenced by economic conditions, while pricing, or reimbursement, is partially driven by pressures on commercial insurers. The report says that hospitals will find it "increasingly difficult to maintain the current level of increases in managed care reimbursement over the longer term," because of a decline in commercial members and changes in insurers' Medicare Advantage business.
To that end, my colleague Les Masterson reported in early August that Fitch Ratings had revised its rating outlook of six health insurers from stable to negative while maintaining six other insurers as negative. The negative outlook was based on the possibility of a reform package passing, which is likely to have negative implications on commercial insurers.
Medicare and Medicaid reimbursement rate levels also continue to be in jeopardy. Medicare did not include any reductions in inpatient reimbursement rates for 2010, but this could change. The stimulus bill helped maintain Medicaid reimbursement this year, but with state budgets under pressure, there are likely to be cuts.
Meanwhile, nonprofit hospitals' predicament may be worse when you consider the dismal performance of investments last year. "There are a few issues on the not-for-profit side that the for-profits don't have," says Diaz. "The not-for-profits have seen declines in their investment holdings and have issues around funding pension liabilities."
There is some good news in all of this. Moody's believes many for-profit hospital operators will continue to grow their cash balances as they cut back on capital spending and do fewer acquisitions.