The factors hurting hospital financials also are likely to drive more M&A activity in 2018, according to analysts.

Dec. 13—The not-for-profit hospital sector recently drew negative outlooks from rating agencies over federal policy uncertainty and payer trends.

In December, Moody’s revised its outlook for the not-for-profit and public healthcare sector from stable to negative. The change was based on projections that operating cash flow will contract by between 2 percent and 4 percent over the next 12 to 18 months; that revenue growth will be slow amid “very low” payment rate increases; that there will be an ongoing shift in payment mix to government payers; and that there will be a continued shift to high-deductible health plans (HDHPs).

“We expect rapid expense growth to outpace revenue growth with high labor costs, nursing shortages and rising bad debt,” the Moody’s report stated.

Similarly, Fitch Ratings issued a negative 2018 outlook for not-for-profit hospitals based on “regulatory, political and competitive uncertainty,” increases in Medicare and Medicaid volumes, weakening payer mixes, and limited rate increases from commercial insurers. Those headwinds come amid the ongoing challenge of shifting payment structures from volume-based to value-based, the Fitch report noted.

Despite the financial challenges, Kevin Holloran, a senior director at Fitch Ratings, said he expects hospitals to continue to shift toward value-based payment.

However, that shift is easier when there is both “a push and a pull” by payers and providers that are interested in making the transformation, he said in an interview. Payers provide the pull by incentivizing a shift in delivery and providers “push” by investing the resources needed to succeed under value-based payment.

“So if the [Affordable Care Act] is picked apart, they will lose some of that pull,” Holloran said.  

In contrast, the outlook at for-profit hospitals remains stable, Moody’s concluded in a separate report. The ratings agency expects those organizations to increase earnings by 2.5 percent to 3 percent through increases in outpatient volumes and positive pricing.

Policy Uncertainty

Federal policy will have “marginal near term direct impact, but continued uncertainty is credit negative” for not-for-profit hospitals, according to Moody’s.

“Uncertainty around the [ACA] makes it very difficult for hospitals to effectively plan and model long-term strategies,” the Moody’s report noted.

Fitch noted that the Trump administration still appears committed to repealing and replacing the ACA, including the Medicaid expansion, which has been a boon to hospitals.

“Political turmoil has existed since passage of the ACA; despite surviving three ‘repeal and replace’ attempts, recent executive orders from President Donald J. Trump are beginning to chip away at the ACA, with real potential to negatively affect the acute care sector,” the Fitch report noted.

Moody’s noted that provisions of a quickly advancing federal tax-overhaul bill also will contribute to rising costs for hospitals.

“The proposed tax-overhaul bill—of which a provision would hamper hospitals’ and health systems’ ability to issue tax-exempt revenue bonds—would likely drive up issuance costs and further pressure the industry if passed,” Fitch noted.

2018 also will mark the first full-year impact of disproportionate share hospital (DSH) payment cuts, which began in October. Hospital advocates are suing to reverse those cuts, and federal legislation was recently introduced that likewise would roll them back.

Increasing Costs

Among for-profit hospitals’ increasing costs are higher bad debt expenses, which will pressure margins unless mitigated by improvements in efficiency, Moody’s noted.

Moody’s was more pessimistic about not-for-profit hospitals’ “untamed expense growth.” Expense pressures in that sector include nursing shortages, continued physician and medical specialist hiring, and technology investments.

Other headwinds will include an increase in bad debt due to the spread of HDHPs, rising copays, and reduced ACA marketplace enrollment due to diminished federal marketing.

For-profit hospitals also are vulnerable to any changes to the ACA or Medicaid that lead to increases in the uninsured population or in bad debt expenses, Moody’s said.

Fitch expected profitability to weaken in 2018, although operating performance is expected to closely mirror that of 2017.

“However, Fitch anticipates greater volatility in operating results among individual providers, specifically at the lower end of the rating scale, reflecting a growing pressure on salaries and wage expense, continued erosion in payer mix as more volume is Medicare based and limited commercial rate increases,” the Fitch report stated.

For-profit hospitals will face headwinds from the continued shift to lower-cost care sites, such as ambulatory surgery centers, urgent care facilities, and stand-alone imaging centers, according to Moody’s.

Payer Trends

Low payment rates contribute to slowing revenue growth at not-for-profit hospitals, according to Moody’s, despite “consistent volumes.”

“Hospitals are unable to translate volume increases into stronger revenue growth because of below inflationary growth of reimbursement rates and rising bad debt,” Moody’s noted.

However, at for-profit hospitals, Moody’s expects increases in private insurers’ payment rates to support growth in revenue per adjusted admission.

M&A Increase

Heightened operating pressure—and financial stability challenges at rural hospitals—will spur more not-for-profit hospital consolidations in 2018, according to Moody’s.

Fitch’s Holloran agreed that mergers and acquisitions (M&A) will continue in 2018 and could fuel more shifts to value-based care delivery and payment. He specifically cited new types of M&A, such as this month’s announcement of UnitedHealth’s plans to purchase DaVita Medical Group, one of the nation’s largest physician groups.

Consolidation also will continue in 2018 among for-profit hospitals, according to Moody’s, as local market presence and scale become increasingly important.

Mergers and alignments will continue to gain momentum, according to Fitch, with the volume of M&A deals and joint-venture agreements among hospitals, physicians, and non-acute healthcare providers likely to increase in 2018. The upcoming year will see a “resurgence of megamergers” as providers add size and scale to cut per-unit costs, create clinical efficiencies, and access larger patient populations.

“Heightened operating pressure will drive additional consolidations,” the Moody’s report stated. “We expect that mergers and acquisitions will continue at a rapid pace as smaller and more rural hospitals struggle for financial stability.”

Moody’s said the not-for-profit outlook could change if operating cash flow growth ranges from flat to 4 percent over the next 12 to 18 months, after accounting for healthcare inflation. The outlook could shift to positive if operating cash flow is projected to grow more than 4 percent after inflation. Additionally, a “long-term resolution of federal policy or positive regulatory changes” could improve the sector’s outlook.

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

Publication Date: Wednesday, December 13, 2017