Jan. 2—Ratings agencies are taking an increasingly negative view of the financial future for not-for-profit hospitals.

The latest in a string of dour projections of the future for the providers that have traditionally served as the backbone of the U.S. healthcare system came in a December assessment by Standard & Poor’s Ratings Services.

The ratings agency concluded that not-for-profit hospitals are at a “tipping point,” after which they will have an ever-decreasing ability to offset “changes and negative trends” that have mounted since 2008. Among the factors driving the negative trend is weakening revenue, such as smaller year-over-year payment rate increases, weaker commercial increases, and flat-to-declining inpatient volumes.

Another problem for hospitals is that most have exhausted the “low-hanging fruit” savings that are easily garnered by relatively simple changes. But many hospitals may not be able to garner the next level of savings, such those stemming from clinical integration and physician productivity, because they lack technological and cultural abilities to obtain them, according to the S&P report.

“We believe that, depending on the specific market, the weaker revenue environment is, or will shortly, outstrip providers' ability to find and fund additional cost reductions,” the report stated.

Ratings Trend Emerges

The S&P report followed Moody’s Investors Service’s issuance of a negative 2014 outlook for not-for-profit hospitals in November due to faster growth in costs than revenue. Moody’s expects the hospitals’ median revenue growth to decline to 3 percent to 3.5 percent in FY13. That would be a sharp drop from FY12’s 5.2 percent growth rate. Low revenue growth also is expected for FY14.

Similarly, Fitch Ratings issued a negative 2014 outlook for U.S. not-for-profit hospitals and health care in December due to pressure on patient volume, continued uncertainty related to healthcare reform, and payment challenges.

“Slowdown in revenue growth evidenced in 2013 will likely deepen in 2014, driven by the declining trend of inpatient volumes, increasing use of high-deductible health plans, the expectation for another year of Medicare sequestration cuts and lower reimbursement rate increases from both governmental and private insurers,” Jim LeBuhn, the leader of Fitch's non-profit health care group, said in a release. “Despite projected increases in the overall insured population, higher utilization may not equate to improved profitability given the general trend in the shift of services to the outpatient setting.”

But not all of the ratings agency analysis has been negative. For instance, the balance sheets of most not-for-profit hospitals rated by S&P have recovered and improved to pre-recession levels, and most are completing significant information technology upgrades.

“The hope is that eventually providers will be able to predict a patient's long-term health risks,
which could then be addressed at the earliest stages when it is often cheaper and more clinically effective to do so,” the report stated.

Publication Date: Thursday, January 02, 2014