The outlook could change based on the key variables of inpatient volumes and payment rates.

Aug. 31—Outpatient volume increases continue to counterbalance a rise in costs and bad debt among for-profit hospitals, according to the latest outlook from Moody’s Investor Service.

The result is a stable outlook for the sector for the next 12 to 18 months, Moody’s reports. The mid-year assessment largely reflected what Moody’s and other ratings agencies expected for 2016. The 1,053 for-profit hospitals reached nearly 19 percent of all U.S. hospitals, according to data from the American Hospital Association (AHA).

The agency expects outpatient volume growth to buoy earnings before interest, tax, depreciation and amortization (EBITDA) results, which are projected to grow 2.5 percent to 3 percent.

Downward pressure on EBITDA will come from rising costs, partially fueled by further increases in practice acquisition and physician employment. Both efforts are fueled by hospitals’ efforts to “drive referrals and more effectively manage patient populations,” Moody’s reported.

Some market watchers have raised doubts about whether physician practice acquisitions would continue because many of the best candidates have been snapped up.

“It’s market by market, so it’s still continuing,” said Dean Diaz, senior vice president for Moody’s. “It’s probably to a large extent already factored in, but as companies try to continue to grow their market presence, there’s still a piece of that strategy.”

Further sharp drug price increases also were expected to pressure hospital margins.

That would carry on the high drug-spending trend highlighted earlier this month by the Altarum Institute. Year-over-year prescription drug spending grew 8.3 percent from June 2015 to June 2016, which was the highest growth among the major healthcare categories that the Altarum report tracks.

Bad Debt

Another growing challenge facing for-profit hospitals is bad debt. Moody’s expects an increase in bad debt fueled by a growing share of patients enrolled in high-deductible health plans either through their employers or Affordable Care Act (ACA) marketplaces.

“It’s just more of a general trend to push more of the payment responsibility to the patient,” Diaz said.

The share of employees with high-deductible health plan (HDHP) coverage reached nearly one-quarter of those with employer-provided coverage in 2015, according to a national tracking survey. Meanwhile, 43 percent of 2016 marketplace enrollees have an average deductible of at least $2,500, according to a report from the Centers for Medicare & Medicaid Services.

A recent study by Northwestern University researchers found that a sizeable 2014 uncompensated care decrease at for-profit hospitals in Medicaid expansion states was driven entirely by large reductions in bad debt.

A recent Fitch report noted that operating trends at for-profit hospitals improved industrywide starting in mid-2014.

Despite the bad debt impacts of the ACA marketplace plans, the Moody’s report warned of even worse bad debt impacts if the marketplaces falter amid recent large insurer departures and rate hikes. Enrollees fleeing the marketplaces could lead to more uninsured patients showing up at hospitals.

Other trends affecting for-profit hospitals’ margins include the increasing use of value-based payment or alternative payment models. For instance, CMS is implementing payment model changes that go beyond the pilot and voluntary programs, such as the mandatory bundled joint replacement payment program for providers in 67 metropolitan statistical areas.

Other innovative arrangements that Moody’s expects to continue are hospital joint ventures and clinical affiliations. Such arrangements often are much cheaper for hospitals than acquisitions. However, depending on the ownership split, such partnerships may reduce EBITDA.

“A lot of times what is happening is that the hospital operators are contributing their assets to the joint venture,” Diaz said. “Once they contribute those assets, there’s a minority interest piece that is taken out. So, we look at less minority interest because that’s a proxy for the cash flow that will be available to service the debt. So, they are giving away that interest to the joint venture partner.”

Inpatient Admissions Drop

Inpatient admission have slowed from 2015, when they increased by 0.75 percent, fueled by an improving economy and certain Affordable Care Act provisions, according to a Fitch report. The recent slower growth is part of an ongoing shift from inpatient to outpatient care in the for-profit sector.

During the next 12 to 18 months, Moody’s expects inpatient admissions at for-profit hospitals will be flat on average or increase 1 percent, as both commercial and government payers continue to shift volumes to lower-cost outpatient settings.

“It’s been an ongoing trend,” Diaz said. “Part of it has been from the additional scrutiny on inpatient versus observation determinations.”

The short-stay admissions review program has been temporarily halted amid CMS retraining efforts of contract auditors. Problems in the enforcement program have produced a 10-year backlog of appeals as hospitals seek to overturn the inappropriate denials for patient care provided, according to the AHA.

“It’s a number of factors that we’ll continue to see, and that’s why outpatient growth continues to outpace inpatient right now,” Diaz said.

The largest factors affecting whether the for-profit hospital outlook swings either positive or negative are going to be either increases in inpatient volumes or decreases in rates. Diaz sees admissions as the more likely of the two.

“Inpatient volumes are growing off a much smaller base at this point, so you could start to see a turn in that as you are looking at year-over-year statistics,” Diaz said.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Wednesday, August 31, 2016