Nonprofit healthcare providers may be at a tipping point with mounting negative pressures and more downgrades anticipated in 2014, a recent Standard & Poor’s ratings report said.
Despite steady recovery from the recession and financial crisis over the past several years, other factors are weighing down providers, including revenue constraints, healthcare reform readiness, soft demand for inpatient services, lower reimbursement rate increases and movement towards payments for value and away from fee for service, and outstripping their ability to launch effective countermeasures.
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Many providers have already made adjustments. However, “… even the strongest hospitals and health systems are, at best, only likely to hold existing margin and reserve levels while weaker providers will likely see ongoing operating margin and cash flow erosion and, eventually, balance sheet weakness, leading to rating deterioration beginning in 2014,” the report said.
As a result, finding cost savings is getting more difficult, takes longer and requires more capital spending to realize. As healthcare shifts more to outpatient services, competition for patients is intensifying.
“… most providers are fighting for every patient, especially on the remaining inpatients in highly profitably service lines,” the report said. Hospitals are competing on price as lowest-cost provider or on quality.
Hospitals must be more aggressive in managing appropriate staffing levels to match volume, budget accurately and convert facilities once designed for inpatient use to outpatient care delivery, S&P said in the report.
Even the expected spike in the insured population may not result in higher utilization and improved profitability, the ratings group forecast. The bumpy rollout of the federal health insurance exchange and some of the state-based marketplaces has affected the number of individuals enrolling. Hospitals in states that have chosen not to expand Medicaid will also be affected negatively over the long term.
Mergers and acquisitions were the source of many of the rating changes in 2013. The number of upgrades and downgrades were essentially even, with 36 downgrades compared with 34 upgrades. The ratings downgrades in the second half were increasingly negative, suggesting a more rapid deterioration of the credit climate in 2014.
The trend in mergers will continue next year, and for several years thereafter, as hospitals and even large health systems seek partners to build a larger footprint and increase their market or service offerings, noted S&P.
In spite of all the negative factors pressuring providers, there are some positive factors cushioning providers against some of the rating pressures, including:
- Heath systems generally clawed back from the recession and significantly improved their balance sheets, with reserves at record highs.
- The testing of value-based models of care and payments is disrupting the status quo, and the diversification of such models is a sound strategy going forward. For example, some health systems have experimented with accountable care organizations within a segment of their patient population or their own employees, and managed care insurance products. Health systems have developed stronger ties with their physicians.
- Many of the rated systems have completed significant information technology installations, including electronic health records and processes for meaningful use payments, with anticipated improved quality and lower costs over time.
- Taxes or fees assessed on hospitals and health systems have helped to supplement payments to improve Medicaid reimbursement in some states and general healthcare programs in others, and for many providers, have made the difference between breaking even and operating losses.