Staying Strong Under Pressure: Nonprofit Hospitals Discuss the Challenges and Opportunities of 2014

Nonprofit hospital and health system leaders face a gloomy forecast for 2014, but they're working to stay as financially strong as possible.

Looking forward to 2014, Michael Rowan, executive vice president and COO of Englewood, Colo.-based Catholic Health Initiatives, sees a number of financial hurdles up ahead for his health system.

Utilization of hospital services is falling across the industry, he says. Additionally, like other providers, CHI faces Medicare reimbursement cuts under the Patient Protection and Affordable Care Act along with other payment reduction measures such as sequestration.

On top of all that, CHI isn't sure how the health insurance exchanges established under the reform law will play out and what they will mean for the system.

"There's a lot of mist and fog out there," Mr. Rowan says.

CHI isn't the only one sizing up these concerns and challenges. Across the nation, nonprofit hospitals and health systems face mounting financial pressures including pay cuts and uncertainty about the effect of healthcare market reforms.

In the third quarter of 2013, Moody's Investors Service downgraded 10 nonprofit hospitals and health systems compared with eight upgrades, illustrating a trend of weakening nonprofit hospital credit profiles. Reduced patient volumes due to a shift toward observation stays and the rise of high-deductible health plans and corresponding increase in bad debt have strained nonprofits' finances.

The forecast for the future paints a similarly gloomy picture. An October repot from Moody's concluded the ambiguous effects of the health insurance exchanges will hurt nonprofit hospitals. Although the exchanges are expected to shrink the uninsured population, risks such as the possibility that commercially insured patients will switch to exchange plans with lower reimbursement rates could turn the development into a credit negative for nonprofits, according to Moody's.

In the face of current hardships and grim predictions for the years ahead, CHI and other nonprofit healthcare organizations are working to stay fiscally strong while meeting the demands of reform.

"We'll continue to adjust and set the goals higher and higher in terms of how we ultimately maximize our quality to the lowest possible cost per unit of service," says Alec King, senior vice president at Texas Children's Hospital in Houston. "It's a race without a finish."

Medicare, Medicaid and sequestration: Big cuts for nonprofits
Medicare and Medicaid pay cuts are one of the most pressing concerns nonprofit providers face going forward, says Caroline Steinberg, vice president of trends analysis at the American Hospital Association.

"Hospitals operate on very thin margins, so that kind of cut really hits the bottom line," she says.

Dan Steingart, assistant vice president at Moody's, also identified government payer reimbursement reductions as a major source of stress for hospitals and health systems.

"Compounding that fact are what have been very sluggish volume trends and volume that's moved from an inpatient to an outpatient setting," he says.

The PPACA contains cuts that will reduce Medicare expenditures by an estimated $379 billion from 2012 to 2021, according to Congressional Budget Office projections. Furthermore, the law will reduce disproportionate share hospital payments — which go to providers who provide high levels of charity care — by $64 billion during the next six years. Outside of the PPACA, providers also face nearly $45 billion in Medicare sequestration cuts during the next decade.  Moody’s is projecting median revenue growth for its rated hospitals to decline to a range of 3 percent to 3.5 percent in fiscal year 2013 as a result of these cuts and volume pressure; median revenue growth was 5.2 percent in FY 2012.

Furthermore, hospitals in the 25 states that have opted not to expand Medicaid in 2014 will face additional hardship, since they won't see more insured patients to make up for the pay cuts, Ms. Steinberg says.

"They're not getting the promised coverage expansion that they thought they would," she says. "The Supreme Court decision [to make Medicaid expansion optional] really hit hospitals hard."

Meanwhile, in states that are expanding Medicaid under the PPACA, providers hope the development will help strengthen their margins.

"The people who are most likely to get Medicaid are people who historically haven't had insurance, so that will mean a higher portion of patients will have insurance," says Mr. Rowan. "It will be an improvement over what has historically been the case."

The uncertain impact of the PPACA health insurance exchanges
The new health insurance exchanges, a key part of the PPACA, are expected to provide health insurance to millions in 2014. That influx of newly insured people might seem like good news for hospitals, but there are potential downsides, says Mr. Steingart.

It's unclear how many people will enroll in health plans through the new marketplaces and what the composition of that enrollee population will be. He says the reimbursement rates from the plans being sold through the exchanges also appear to be about 20 to 25 percent lower than the rates commercial insurance pays.

"There are going to be some folks who just move from traditional insurance over to the exchanges," he says. "That's not net new business. That's the same business with lower reimbursements. There's a lot of uncertainty about whether the amount of new business will offset lower reimbursement rates."

He says it's also unclear how many people signing up for coverage through the marketplace will choose high-deductible plans, which shift more healthcare cost responsibility onto the patient and have been correlated with an increase in bad debt for hospitals.

The risk the health insurance exchanges pose in 2014 seems to vary depending on the market a hospital or health system operates in. Mr. Rowan says he hopes the exchanges will help CHI in the long run, since more people who used to be uninsured will gain coverage. However, possibilities such as employers opting to no longer provide health plans are a source of concern for the health system. "It will probably mean fewer people with commercial insurance," he says of employers changing their health benefit strategies.

Meanwhile, Mark Johnson, senior vice president and CFO of West Des Moines, Iowa-based UnityPoint Health doesn't anticipate significant activity on the exchanges in 2014 outside of Medicaid expansion. Many of the dominant payers in Iowa aren't selling coverage through the new marketplaces next year, he says.

"Because there's not a lot of participation on the payer side, we probably won't see a lot of impact in right away," he says. "However, we expect exchange activity to pick up in 2015."

Meanwhile, Texas Children's expects to see its uninsured population potentially shrink as a result of the exchanges.

"A lot of potential exchange enrollees could experience this as an education opportunity, learning that their kids might already qualify for Medicaid," says Mr. King. "We might see some movement for kids who are eligible but haven't yet enrolled."

On the other hand, he says employers could also choose to cancel their commercial health coverage as a result of the exchanges opening, which could lead to some children losing their parents' commercial insurance. However, it's far too early to predict if that will happen or not and to what extent it might affect Texas Children's, he says.

Cutting costs and improving quality: Ways nonprofits are working to stay strong
UnityPoint Health has made financial sustainability one of its core pillars, and, to uphold that, the system has created six committees with different focus areas such as increasing revenue and standardizing best practices in the clinical space, Mr. Johnson says.

The system is also preparing to partner with payers to offer products through the exchanges and has taken initiative in transitioning to value-based care through risk-based agreements with payers and involvement in the Pioneer ACO and Medicare Shared Savings programs.

Bobbi Brown —vice president of finance for data and analytics vendor Health Catalyst — says nonprofit hospitals and health systems need to focus on continual improvement, data and cost containment throughout the organization. Ms. Brown, who previously served in financial leadership roles at Sacramento, Calif.-based Sutter Health and Oakland, Calif.-based Kaiser Permanente, advises healthcare executives to share cost and quality data with everyone, especially physicians and nurses, to get them on board with cost-cutting efforts.

"The ability to get data down…to every level in the organization is extremely important," she says.

Texas Children's is one organization working hard to cut costs through various initiatives, says Mr. King.

"One thing we're doing is looking at opportunities to move our lower-acuity patients into lower cost environments of care," he says. "It's much easier to ensure we have the necessary quality for ear tubes, for example, at our main campus, but, truth be told, that could be done at our community campus at a lower cost."

Texas Children's has also examined labor efficiencies and adopted a more analytical approach to determining staffing targets, he says.

CHI is similarly engaged in various cost-reduction efforts, according to Mr. Rowan. He says the system is trying to eliminate waste and redundancy. At the same time, it's investing in what he calls the next era of care through projects involving telemedicine, population health and clinical technology that will allow the system to not only collect but also effectively utilize data.

Ultimately, Mr. Rowan of CHI says his system likes to look at the positive developments healthcare reform could bring rather than the potential pitfalls.

"There are challenges out there, but we're very optimistic," he says. "We always say in CHI the changes taking place in the healthcare industry are actually an opportunity to actualize our mission…to provide good care to the population we serve."

More Articles on Nonprofit Hospitals:
Moody's: Nonprofit Hospitals Still Face Gloomy Outlook in 2014  
Moody's: Hospital Downgrades Have Surpassed Upgrades Every Quarter This Year  
Fitch: Hospitals in States Not Expanding Medicaid Face Dire Financial Fate 

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