Cash flow growth in the healthcare sector jumped in 2014 and remained strong through June 2015, prompting Moody's to upgrade the sector's outlook from "negative" to "stable." But key drivers are not performing as strongly now, signaling a potential slowdown.
The nation's not-for-profit healthcare sector will likely see diminished cash flow and patient volumes in 2016, although the overall outlook in the sector for the next 12 to 18 months is "stable," Moody's Investors Service says.
"We expect the current strong growth in patient volumes and cash flow will return to normal levels (3% to 4%) over the outlook horizon because some of the factors driving recent strong performance, such as gains in insurance coverage and strong patient volume growth, will not be repeated in 2016," Moody's says.
Cash flow growth in the sector had been relatively flat for several years but jumped to 12.3% in 2014, and growth through June 2015remained strong at 10.5%. That prompted Moody's in August to upgrade the sector's outlook from "negative" to "stable." Moody's says key drivers of cash flow growth in previous quarters are not performing as strongly, signaling a potential slowdown.
"For example, inpatient volume growth has been boosted by gains in insurance coverage and recent growthcomes after years of declines, likely reflecting some pent up demand," Moody's says. "Although patient demand remains strong compared to thelast five years, patient volume growth began to slow by June 2015, and many hospitals are projecting flat growth in 2016.
Moreover,hospitals continue to see more patients in the outpatient setting, due in part to regulatory changes from payers and advances inpatient care that require fewer hospitalizations. Reimbursement for outpatient services is significantly lower than for inpatient care."
On other fronts, not-for-profit providers continue to see bad debt falling, although at a slowing rate. The reductions in bad debt are credited to the increased health insurance coverage under the Patient Protection and Affordable Care Act. Nearly all of the reductions in bad debt are occurring in states that expanded Medicaid, while bad debt reduction in non-expansion states "has slowed considerably."
Moody's says Medicare and Medicaid enrollment is expected to expand over the next two years as the population ages, and more states expand their Medicaid rolls.
"However, government payers reimburse at rates below commercial insurance, pressuring margins; reimbursement from the government is not typically subject to negotiation," Moody's said. "The question of if, and when, additional states expand Medicaid eligibility will affect future financial performance as costs increase; two of the most populous states (Texas and Florida) remain opposed to Medicaid expansion, but will face continued pressure from the hospital industry and others to change course."
Another potential source of pressure on margins will be the expansion of population health programs designed to reduce inpatient services and lower costs. Moody's says the sector could lose money on population health "unless hospitals successfully enter into risk sharing contracts or make investments to capture volume in lower cost settings."
Effects of Payer Consolidation
"Strategic investments, like physician practice acquisitions and insurance company start-ups, are low margin businesses and can lead to large operating losses during the initial phase," Moody's says. "Additionally, necessary investments in information technology and electronic health records are a significant and growing expense."
Not-for-profit providers could also see more pressure coming from a consolidated commercial health insurance sector, especially the mega-mergers of Anthem Inc. and Cigna Corp., and Aetna Inc.'s acquisition of Humana.
The sector will also have to weather the growing pains of the health exchanges created by the ACA, many of which are under financial stress.
"Most major health insurers reported losses on their exchange business and many insurance co-ops (not for profit insurance companies founded under the ACA) have failed in recent months under mounting losses," Moody's says. "Additionally, the risk corridor program, established to stabilize premiums by having insurers share gains and losses on qualified ACA plans, will pay only 12.6% of the amount owed to insurance companies."
Moody's notes that some larger not-for-profit health systems that are building their own insurance platforms will face the same challenges as traditional insurers in these low-margin business lines.
The not-for-profit sector could also see significant competitive challenges from non-traditional providers in the urgent care arena, such as Walgreens Health Clinics and CVS MinuteClinics. In addition, Moody's says political and regulatory challenges in the coming years, including the imposition of the "Cadillac Tax" in 2018 could reduce benefits for people with commercial plans.
Moody's says the sector's status could upgrade to "positive" in the coming months "if the operating environment continues to improve, allowing for above average growth in operating cash flow. We would consider changing the outlook to positive if we expect sustained operating cash flow growth above 4% over a 12 to 18 month period, after accounting for healthcare inflation."
On the other hand, the outlook could downgrade to negative if cash flows are flat or negative.
"Some factors that would contribute to a negative outlook include: states significantly reducing Medicaid reimbursement, a significant increase in the uninsured rate, or legislative or regulatory changes that significantly alter the healthcare market," Moody's says.
John Commins is the news editor for HealthLeaders.