From Stable to Negative: 6 Reasons Behind Gloomy Non-Profit Hospital Outlooks

In 2008, Moody's Investors Service changed the outlook for non-profit hospitals from "stable" to "negative." Much of it was driven by the financial meltdown and recession, and the economy continues to take its toll on hospital finances today. Non-profit hospitals represent roughly 80 percent of all hospitals in the United States, and it might help the sector to understand some of the specific root causes, says Lisa Goldstein, an analyst at Moody's.

An overall "negative" outlook does not mean every non-profit hospital will be downgraded, she says. The next one to two years will see several pressures coming downward on hospitals, and that's simply a part of the healthcare industry's overall volatility. Ms. Goldstein says recognizing the challenges and reasons behind the outlooks can help provide a little clarity and, perhaps, ideas for hospitals to fight the negative trends.

1. Uncertainty behind healthcare reform. The Patient Protection and Affordable Care Act was a large piece of legislation that changed several components of the healthcare system, but many of the provisions of the PPACA have yet to take full force, Ms. Goldstein says. Some provisions, such as Medicare payment protections to rural hospitals, have already taken place, but others, such as health insurance exchanges, will not be effective until 2014. The impact of some of these programs simply will not be known for another four years or more, and the only certainty behind them is they will alter the way hospitals provide care. Additionally, the individual mandate of health insurance still awaits constitutional review from the Supreme Court, adding to the "wait and see" list for hospitals.

Additionally, the Budget Control Act will impact hospital reimbursements in some type of fashion. The Joint Select Committee, better known as the supercommittee, must find at least $1.2 trillion in cuts over the next 10 years by this Thanksgiving. Medicare and Medicaid are primed for roughly $320 billion of those cuts, but nothing is certain. If the supercommittee cannot agree on a plan, the sequestration or "trigger" cuts would initiate a 2 percent cut to Medicare reimbursements. All third parties and hospitals can do is monitor what happens in Congress very closely, Ms. Goldstein says.

2. Medicare, Medicaid reductions. CMS issued its final Inpatient Prospective Payment System rule in August, which provides a 1.1 percent net increase in Medicare reimbursements for fiscal year 2012, but as mentioned, Medicare reductions are now inevitable through the Budget Control Act. Medicare accounts for roughly 43 percent of a non-profit hospital's revenue base, but the federal government now seeks to reduce deficit and reign in the Medicare costs, Ms. Goldstein says. Additionally, state lawmakers are trying to balance their own budgets by cutting Medicaid reimbursements, as is being seen in New Hampshire and Wisconsin. Non-profit hospitals again have large portions of their budgets at the mercy of state and federal lawmakers, she says.

3. Slowed reimbursements from private payors. From 2009 to 2010, hospitals only experienced a 4 percent revenue growth, the lowest in the past two decades, Ms. Goldstein says. Similar to the non-profit hospital industry, Moody's maintains a negative outlook on the health insurance sector because of low membership due to massive employment and higher regulation and scrutiny of private payor policies. People without jobs are not able to afford the private insurance, leading to the decline in enrollment, and health insurers looking to increase their rates by 10 percent or more must submit their request to state or federal regulators who will determine if the hikes are acceptable. For years, hospitals have subsidized their losses from low Medicare and Medicaid reimbursements through private payors, but that ability is dissipating, Ms. Goldstein says. Now, hospitals have to be even more sharp-witted in their negotiations with private payors.

4. Labor uncertainty. Hospitals are labor-intensive enterprises, as salaries and benefits could represent upwards of 50 percent of a hospital's total expenditures. This has led to severe reductions in workforce. Downsizing the labor footprint is leading to a new wave of labor management for hospitals, Ms. Goldstein says. There are going to be fewer nurses per patient, and a lot remains to be seen about how productive a hospital can be with such a decline in labor.

5. Changes in hospital operational process.
Bundled payments and ICD-10 are likely to disrupt hospital revenues, and these new transitional operations are going to require a lot of effort on the part of non-profit hospitals. These hospitals have to decide how they will gain efficiencies in these new episodes of care and coding schemes, and balancing these changes will not be easy to do at first. "Because top-line revenue growth is coming down, expense management is where the focus has been and will be," Ms. Goldstein says.

6. Increase in uncompensated care. The depressed economy is producing increases in charity care as individuals who have lost their healthcare or COBRA coverage are requiring immediate medical help in lieu of preventive care. For example, hospitals in Iowa provided more than $850 million in total uncompensated care, which was a 6.8 percent increase from 2009, and these figures are more prevalent at non-profit entities. However, Ms. Goldstein says many hospitals are expanding their front-end registration process to qualify more patients for government funding, which is much more favorable than simply classifying those patients as a bad debt expense.

Related Articles on Hospital Finances:

Moody's Raises Outlook for LifePoint Hospitals
3 Hospital Systems Receive Ratings Downgrades in Last Month
Moody's: 20% of Non-Profit Hospitals in the Red

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