Stagnant revenue growth makes outlook poor
NEW YORK — There has been much heated national discussion surrounding credit rating agencies since Standard & Poor’s downgraded the sovereign credit rating of the United States.
Many have questioned S&P’s methodology, given that two of the other “big three” ratings agencies – Moody’s Investors Service and Fitch Ratings – did not downgrade the U.S. sovereign rating. In the healthcare community, however, most everyone anticipates credit rating downgrades of not-for-profit facilities. Indeed, with the rate of not-for-profit hospital revenue growth at its lowest point in two decades they’re almost a given.
"Hospital rating downgrades will likely increase in the short term unless expense reductions and productivity gains compensate for stagnant or weak revenue growth," said Lisa Goldstein, senior vice president at Moody’s. "While better-managed hospitals can stave off rating downgrades, smaller hospitals are coming under particular stress."
In a recent Moody’s report, Goldstein notes that falling revenue growth has become the most important and immediate challenge confronting US not-for-profit healthcare providers. Reimbursement pressures from all major payers – Medicare, Medicaid and commercial health insurers – has prompted Moody’s to assign a negative outlook for the not-for-profit hospital sector.
"Continued rate reductions for Medicare are inevitable as Washington seeks to reduce the deficit and reign in the program's costs," said Goldstein. "This is critical as Medicare comprises nearly half – 43 percent – of hospital gross revenues."
Hospitals have responded to revenue reductions with spending cuts, including layoffs, but Martin Arrick, managing director at Standard & Poor’s, said this may not be sustainable.
“Providers are going to have a harder and harder time offsetting what is an increasingly hostile environment,” Arrick said during a recent conference call.
S&P has affirmed that the U.S. sovereign credit rating downgrade should not be seen as a harbinger for not-for-profit healthcare ratings. Nevertheless, the agency views the relatively high level of reimbursement and regulatory risk in the healthcare sector as a component of the sector's industry risk.
The depth of future reimbursement cuts to providers – hospitals and physicians – will determine how ratings agencies assess credit risk. But S&P has emphasized that facilities with already-thin operating margins, inflexible cost structures and high dependence on governmental payers are more likely to experience credit stress over the next few years.
"Even as a weak economy and high unemployment have produced increased enrollments in Medicaid, widespread rate reductions to the program are expected due to federal budget reforms," said Goldstein. "Also, funding cuts are being made to Medicaid by state governments grappling with budget challenges, adding significant stress to non-profit hospitals for at least the next several years."
Goldstein added that the transition of many hospitals away from fee-for-service care to bundled payment arrangements is another potential disruption to revenues identified. Moody’s predicts that managing two very different payment models, which will be necessary for a period of time, will likely be similar to what happened in the mid-1990s when hospitals entered into capitation contracts.