Two rating agencies note the growing debt load from mergers and acquisitions.

April 25—As 2016 has progressed, rating agencies have begun to assess the trajectory of for-profit hospitals.

Here are some of the important trends they have identified so far.

1. For-profit hospitals are unlikely to post another year of admissions increases in 2016, according to a recent Fitch Ratings report. Such an outcome would be a change from 2015, when same-hospital admissions increased by 0.75 percent, fueled by an improving economy and certain Affordable Care Act provisions. Payers’ efforts to reduce short stays and readmissions were expected to produce about a 1 percent decrease in admissions and a 1.2 percent increase in adjusted admissions in the first quarter of the year.

2. Fitch expects a weak volume performance in the first quarter of 2016, due to a base effect from the strong volume performance during the same quarter of 2015.

3. For-profit hospitals’ investments in additional acute service lines will help stabilize the slow erosion in admissions, according to Fitch. However, those providers will continue to see a shift to outpatient services and stiff competition from other healthcare providers seeking to capture that market share. Growth in adjusted admissions will continue to outpace growth in admissions, with the degree depending on the amount of the outpatient market captured by the hospitals.

4. Regulatory reforms, such as Medicare payment penalties for readmissions, continue to affect admissions—especially for hospital providers in rural markets, Fitch noted. The agency noted that process and productivity enhancements and technological innovation are among the factors keeping more patients out of the hospital.

5. “Volume headwinds” continue to buffet rural hospital markets to a greater degree compared with other hospitals, Fitch found. For instance, Community Health Systems and LifePoint Health, which traditionally focus on rural markets, were the only two Fitch-rated for-profit hospital companies that reported no admissions growth in 2015. The agency noted that rural hospitals usually are more vulnerable to variations in lower-acuity patient volumes brought on by regulatory reforms and seasonal fluctuations, such as in flu and respiratory illness.

6. The financial profile of the for-profit hospital sector is weaker than it was three years ago, according to a recent report from Moody’s Investors Service. The deterioration in the providers’ financial position was blamed on higher leverage following heavy acquisition activity.

7. The sector’s median debt/EBITDA increased to 5.2x at year-end 2015 from 4.7x in 2012, as consolidating companies failed to effectively reduce leverage as much as Moody’s analysts had expected. However, modest deleveraging over the coming year was expected to improve the sector’s financial flexibility.

8. For-profit hospitals were expected to continue to invest in outpatient services, according to Moody’s.

9. Volume growth at for-profit facilities will outpace inpatient admissions as commercial payers shift patients to lower-cost settings, according to Moody’s. One consequence: Much lower capital expenditures needed to maintain outpatient services compared with inpatient admissions.

10. Standard & Poor's Ratings Services’ outlook on the for-profit sector remains stable for 2016, according to a recent report. The agency expects the sector to continue to benefit from reimbursement stability and above-GDP growth in healthcare spending in 2016, which will be only partially offset by higher cost inflation.

11. Debt-financed merger and acquisition (M&A) activity posed the major risk to S&P’s expectation for ratings stability in 2016. For-profit hospital M&A activity was expected to remain “robust,” and most hospital debt issuers were viewed as capable of continued acquisitions without triggering negative ratings. Significant increases in the size of transactions, however, could trigger ratings pressure.

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

Publication Date: Monday, April 25, 2016