July 25—The decline in inpatient use rates and inpatient revenues is one of the biggest contributors to the negative credit outlook for the not-for-profit healthcare sector, such that “Right now, it feels like this is the straw that’s breaking the camel’s back,” according to Martin Arrick, managing director for Standard & Poor’s.

A number of organizations are reporting 10 to 12 percent declines in inpatient use rates, Arrick said at ANI: The 2014 HFMA National Institute this past June. “Obviously, that’s a major hit to your financial numbers,” Arrick told an audience of primarily healthcare finance professionals, and that is hurting not only hospitals' bottom lines, but also their access to capital.

The past three or four years, hospitals have “really done an excellent job keeping up with the pressure on revenues,” Arrick said. But the decline in inpatient utilization and revenue—prompted largely by an increase in high-deductible insurance plans, the move toward value-based payment models, improved quality of care, and increased emphasis on redirecting care to lower-cost settings—“has really been so difficult for so many folks.” Meanwhile, insurance companies are benefitting from the trend.


In response, “The leading organizations across the country are really moving to an increase in percentage of at-risk [contracts with insurers and other purchasers] because they feel that they’re doing the hard work to lower utilization, and they want to share in the benefits, and they don’t want to shoot themselves in the foot because they’re doing a better job,” Arrick said.

However, for most hospitals and health systems, the move toward at-risk contracts has been slow. Arrick estimated that for two-thirds of the healthcare organizations Standard & Poor’s talks with, “The percentage of money that’s at risk is probably less than 5 percent. It’s barely a blip on the radar screen.”

Impact of a Weaker Revenue Environment on Hospitals

For years, hospital and health system CFOs “have been on a journey to cut costs, lower capital spending, and they’ve been able to meet the challenges of a much tighter revenue environment,” Arrick said. “But we noticed last year, all of a sudden, a lot of organizations were really beginning to lose the battle a little bit.”

Hospitals’ ability to continue to cut costs has been eclipsed by the pressures of a tighter revenue environment resulting not only from declines in inpatient utilization, but also reductions in elective surgeries, sequestration, and an increase in observation stays.

Credit analysts also are seeing “much more competition for patients,” Arrick said. “We’re seeing larger systems reach further and further away from their home base to try to bring in more patients.” And as hospitals and health systems amp up efforts draw patients to their facilities, “Obviously, everybody can’t win in that game.”

In this environment, many community hospitals are trying to compete on price: “They’re trying to enhance price consciousness, because that’s where they think they can win.”

Bright Spots for Long-Term Credit Outlook

But at a time when credit downgrades are beginning to exceed upgrades, there are bright spots for the healthcare sector.

The implementation of new healthcare business models, consolidation that results in reduced costs and improved value, and more are positive signs for the healthcare credit market, Arrick said. ““A lot of folks do have relatively good balance sheets, and that’s a source of strength for the sector, he said, adding, “It’s still a relatively stable sector.”

Additionally, investments in IT, while expensive, will benefit organizations over time, he said, as will the move toward new business models for care delivery.

Ultimately, hospitals and health systems that are able to hold their existing margins in today's healthcare environment will be better-positioned to manage the challenges of reform, Arrick said.



Publication Date: Friday, July 25, 2014