Aug. 8­—The credit outlook of not-for-profit hospitals and health systems is darkening as they near the limits of cost-cutting efforts and lose extra sources of income, according to a prominent rating firm.

Standard and Poor's Rating Services reported Aug. 8 that the providers' costs generally are increasing and revenue is falling.

"The 2012 medians reflect a continuation of the peak in metrics reached in 2011, but we expect ratios to soften gradually in the next one to two years as incremental pressures persist and even intensify amid industry changes related to health care reform," Kenneth Gacka, a credit analyst at Standard & Poor's, said in a release.

Among the factors reducing the bottom lines of providers were lower-than-historical rate increases, higher bad debt and charity care costs, and increased operating and capital expenses related to electronic health record (EHR) implementation, according to the report. Hospitals have compensated for the increased expenses partly through cost-saving initiatives, federal subsidies provided through the EHR meaningful use program, and many states’ provider fee programs.

The analysts also concluded that after years of successful cost cutting efforts, "providers are finding that the next level of savings is more difficult to achieve."

"We anticipate that many of these pressures will continue in the near term as health care reform is implemented," the report stated. "However, some of the bright spots that helped maintain financial profiles are going to be less sustainable in many cases."

Data indicating a weakening in the financial standing of not-for-profit hospitals included the industry trend of an increasing number of negative outlooks. The percentage of health systems with negative outlooks grew from 6 percent in 2011 to 11 percent in 2012. Similarly, the spread between upgrades and downgrades moved from more positive in 2011 to generally balanced last year.

Despite hospitals facing gradually "softening metrics in the next two years," most were expected to maintain sound credit profiles. However, providers at the lower end of the credit spectrum are expected to face greater pressure.

The S&P analysts also anticipated a continuation of the trend toward health system mergers and acquisitions as a way to increase their "negotiating clout" with suppliers and private payers and to better manage population health. The provider acquisitions also are expected to include more purchases outside of acute care, such as other non-hospital providers and health insurance plans.

Publication Date: Thursday, August 08, 2013