Challenges at for-profit hospitals will include wage inflation due to staffing shortages, and rising medical specialist and supply expenses. Some organizations have taken steps to address those pressures.


Oct. 24—The outlook among for-profit hospitals remains stable over the coming 18 months, according to Moody’s Investors Service.

In a new report (log-in required), Moody’s increased its forecast for earnings growth for the sector, “reflecting modestly favorable pricing trends and improving margins at some operators.

Moody’s now expects aggregate same-facility EBITDA to grow 3.5 percent to 4 percent annually over the next 12 to 18 months. In comparison, the rating agency’s expectation six months ago was for 2 percent to 3 percent growth.

“The increase will come predominantly from same-facility net revenue growth and benefits from cost-cutting and merger-related synergies, as well as the renegotiation of services and supply contracts,” the report stated.

The stable industry outlook indicates Moody’s expectation that conditions will not change significantly.

Headwinds Continue

The challenges that for-profit hospitals face in the coming period include wage inflation due to staffing shortages in certain markets, and rising medical specialist and supply expenses.

Additionally, patient volumes are projected to be flat or increase by only 1 percent in the coming 18 months as “payers aggressively shift services to non-hospital care settings.”

Other trends include an expected increase in insurer and patient use of lower-cost urgent care centers, freestanding emergency departments, and “other, more consumer-oriented care settings, which will keep less sick, or low-acuity, patients out of the hospital.”

Another trend is the increasing shift of enrollees from traditional Medicare and Medicaid programs to Medicare Advantage and Medicaid managed care plans.

“These are more likely to tightly control medical costs, leading to an overall reduction in services,” the report stated.

Additionally, for-profit hospitals face rising nurse and physician wages and increasing supply and service costs, which will pressure profit margins.

Despite such unfavorable trends, for-profit hospitals could benefit from low unemployment and aging demographics.

Hospital Responses

Steps that for-profit hospitals are taking to counter these challenges include actively adjusting their staffing, supply, and medical specialist fee contracts where possible.

Moody’s noted that Community Health Systems and Quorum Health Corporation have both divested a number of negative or very low-margin hospitals, “which will help stabilize profitability.”

Tenet Healthcare Corp. has benefited from a significant restructuring program that Moody’s forecasts to lift its EBITDA margins by more than 150 basis points in 2018.

Moody’s also concluded that Medicare payment rates for inpatient hospital services are largely favorable; they are estimated to increase by 3 percent beginning in October. But proposed outpatient rates could be negative for some and considerably less favorable than last year

A key Medicare proposal would cut payments for hospital-based clinic visits to the same level as physician office visits, which are about 60 percent lower.

“Hospitals that acquired large numbers of medicine-based or primary care physician practices would be particularly vulnerable to revenue reductions if CMS cuts these fees,” noted another Moody’s report issued earlier in October (log-in required).

Moody’s concluded in an August report (log-in required) that the proposed rule for Medicare’s Outpatient Prospective Payment System (OPPS) would be a credit negative to for-profit hospitals if finalized.

Beyond the small outpatient pay increase, the OPPS rule would change rules for ambulatory surgical centers (ASCs) to allow more procedures to be performed in those facilities.

The Centers for Medicare & Medicaid Services (CMS) proposed to allow certain procedures that are not currently coded as surgical cases to be covered when performed in an ASC. The proposal included 12 cardiac catheterization codes that are typically performed in a cardiac catheterization lab within the hospital setting.

“In general, as more procedures move to ASCs, hospital revenues would be negatively affected,” noted the earlier Moody’s report.

Even if the hospital owned an ASC, such procedures would be paid at a lower rate than if done in the hospital.

Moody’s expects that CMS will approve more procedures for both hospital outpatient departments and ASCs as medical technology advances and patient safety concerns abate.

Ongoing Medicare payments will also be affected by potential cuts due to quality-related factors. Those include a cut of up to 3 percent in the DRG rate for hospitals that experience excessive readmissions. CMS is introducing a new calculation in FY19 to help hospitals with higher percentages of low-income patients. However, CMS still estimates that about 2,610 hospitals, similar to 2017, will be penalized in FY19.

Waiver Impacts

Another hospital impact could come from the increasing numbers of Medicaid waiver requests by states.

For instance, Arkansas was among the first to establish a work requirement, which it will phase in based on age. Indiana and New Hampshire also received CMS approval for work requirements, while Michigan, Ohio, and other states are seeking approval.

“This would reduce the number of eligible Medicaid recipients and therefore increase hospitals' bad debt rates and reduce volume trends, both credit negatives,” Moody’s wrote earlier.

A federal judge blocked a proposed Medicaid work requirement in Kentucky. Meanwhile, Virginia in January will expand eligibility under its Medicaid program to the limits authorized by the Affordable Care Act. That should have a “modestly positive impact” on hospitals in the state.

In Maine, voters approved expansion, but the governor is seeking to block it due to funding concerns. Idaho, Utah, and Nebraska plan to vote on expansion this November.


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

Publication Date: Thursday, October 25, 2018