Moody's: 4 Reasons 2012 Will Be Financially Challenging for Non-Profit Hospitals

At the beginning of every year, several credit ratings agencies try to assess the short-term prospects of the healthcare industry. Fitch Ratings, Moody's Investors Service, Standard & Poor's and others attempt to encapsulate a 12- to 18-month window into the future, and for non-profit hospitals, the outlook has been gloomy for quite a while now.

On Jan. 25, a Moody's report indicated the outlook for non-profit hospitals and healthcare will stay negative for 2012 — an outlook that has been released every year since 2008, when financial pandemonium swept the country.

Moody's Vice President and Senior Analyst Brad Spielman authored the most recent report on non-profit hospitals, and he gives four reasons why they may continue to have a bumpy financial road ahead.

1. Pressures on hospital revenue. There's no question utilization is down at many hospitals across the country, and low volumes have led to direct pressures on the main revenue sources within a hospital: Medicare, Medicaid and commercial payors.

Medicare, in particular, has been a major reason why hospital CFOs and executive management teams have been sweating. Medicare reimbursement rates declined in fiscal year 2011, and CMS issued only modest increases for fiscal year 2012. The low rates — coupled with future Medicare sequestration cuts from last summer's debt ceiling agreement — will be front and center when hospitals discuss their federal revenue streams. "[This year's] Medicare adjustment was 1 percent, but inflation was at 3 percent," Mr. Spielman says. "Hospitals were still losing money. In 2013, we won't know what that rate is going to be until August, but we expect that rate will also be modest."

Medicaid cuts also threaten the bottom lines of almost every hospital, especially children's hospitals, as several states like Arizona, Florida and New Hampshire have initiated major reductions to their share of Medicaid payments. "In 2011, many states implemented pretty significant reductions," Mr. Spielman says. "We expect more states in 2012 to implement cuts. Plus, the impacts haven't necessarily been fully felt yet from states that have already implemented cuts, so we're going to see that now going forward."

Mr. Spielman adds that as commercial payors — usually the hospitals' saving grace after low reimbursement from Medicare and Medicaid — work toward more innovative reimbursement schemes that include bundled or global payments, hospitals will see lower rate increases or, in some cases, decreased reimbursement rates.

2. Transitioning to new healthcare delivery models. Healthcare reform (i.e., the Patient Protection and Affordable Care Act) has presented new ideas on how healthcare will be managed, but the uncertainty around it has created a negative aura.

Fiscal year 2013, which starts Oct. 1, 2012, will be a telling year of the healthcare reform law, assuming it stands in the Supreme Court. FY 2013 is when several new aspects of the healthcare reform law will begin, including bundled payment programs and penalties for hospitals that have high 30-day readmission rates for acute myocardial infarction, heart failure and pneumonia. Additionally, hospitals have to gear up further for ICD-10 by Oct. 1, 2013, and the potential of tens of millions of people that could be added to insurance rolls by Jan. 1, 2014, if the individual mandate passes. "This is a big area," Mr. Spielman says. "Even without healthcare reform, the industry is changing, and hospitals are going to experience pressure as they go through this period."

3. Sluggish economic recovery. Healthcare spending in the United States is at its lowest growth rate in the past 50 years, and this rate has reflected lower patient utilization. The United States has also been struggling to recover from the financial meltdown of 2008 that led to unemployment levels higher than 10 percent.

Although the country is slowly turning around, a weaker economy has had several adverse impacts on non-profit hospitals, Mr. Spielman says. Less elective healthcare procedures lead to lower patient volumes, charity care and bad debt expenses rise as more unemployed and uninsured people walk through hospital doors and the payor mix becomes more unfavorable as fewer people can afford the better-compensating private insurers.

4. Balance sheet burdens. Mr. Spielman says non-profit hospitals' balance sheets have improved over the last year, but the amount of pressure on their balance sheets is still higher compared with historical levels. The main culprits? Investment volatility, growing pension obligations, more exposure to non-cancelable operating leases and an increase of capital spending funded with cash reserves.

Mr. Spielman says the investment and equity market volatility were particularly troublesome for a hospital's balance sheet in 2011. Although the market did not crash as hard 2008 and 2009, the S&P 500 Index experienced extreme up-and-down fluctuations in 2011, especially between June and October. The volatility makes it more difficult for hospital executives to plan for the future while also constructing new strategic decisions for the short-term. "The market has been so volatile in 2011," Mr. Spielman says. "It creates difficulties in predicting income to use toward operations, causes havoc with pension liabilities and presents challenges for strategic planning. The balance sheet will just look different depending on when you measure it."

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