Capital Finance

Not-for-Profit Hospital Downgrades Increased in 2017: Report

March 28, 2018 7:55 am

A national nursing shortage, rising supply and pharmaceutical costs, flattening patient volume, and ongoing payment pressures fueled the downgrades.

March 27—Credit pressures drove more downgrades of not-for-profit (NFP) hospitals in 2017 than in 2016, with the NFP sector exceeding the downgrade-to-upgrade ratio of the recession years of 2008 and 2009, according to a report this month by Moody’s Investors Service. 

The number of downgrades rose to 41 in 2017, from 32 in 2016, while the number of upgrades fell from 21 to 12. The ratio of 3.4-to-1 was more than double the 2016 ratio. 

Despite a strong economy and the lowest share of uninsured patients since the 2010 passage of the Affordable Care Act (ACA), NFP hospitals faced serious headwinds in 2017—and those pressures are expected to continue, according to Moody’s. 

Rising labor and supply costs and low revenue growth were reflected in the ratings. 

“Additionally, debt issued to renovate and expand inpatient facilities contributed to some of the downgrades because the increased leverage and elevated risks associated with the construction outsized the prior credit profile,“ Moody’s wrote. 

Most Likely to Be Downgraded

The largest number of downgrades affected systems with less than $1 billion in total operating revenue and those in Rust Belt states, including Ohio and Pennsylvania. 

The findings were not a surprise to the Ohio Hospital Association (OHA), which said the report “reaffirms our deep concerns about the health economics facing hospitals.”

The OHA said 61 hospitals in the state are in a “precarious economic situation,“ with low or negative operating margins.

“The challenges facing not only this group, but all Ohio hospitals, are clearly driven by reimbursement pressure from Medicare and Medicaid, renewed efforts by commercial payers to exclude more services from payment, growing pharmaceutical and supply chain costs, physician and nursing shortages, and the costs of keeping up with new healthcare technology,“ OHA spokesman John Palmer said in an email. 

Expense growth outpaced revenue growth for many hospitals and health systems in 2017, according to Moody’s, due to the pressures cited by the OHA. Compensation costs stemming from a national nursing shortage and rising pharmaceutical and supply costs were some of the biggest expenses. 

Flat patient volume over the past two years, after gains owing to the ACA in 2014 and 2015, was a contributing credit-negative factor, according to Moody’s. 

“Payers also contributed to the slower revenue growth trends as many insurers began steering patients to free-standing imaging and urgent care centers and continued to provide lower rate increases to providers,“ according to the Moody’s report. “These pressures were a core theme in several of the 41 downgrades in 2017, which affected $18.1 billion in debt.”

Larger systems were better able to weather these trends. Nearly 60 percent of downgrades in 2017 affected small and medium-sized hospitals and health systems, categorized as those with less than $1 billion in total operating revenue. A little more than half of Moody’s rated NFP healthcare portfolio reported revenue of less than $1 billion. 

Widespread Issues

Credit pressures appeared even in high-growth regions of the country, including Georgia. Four providers were downgraded in 2017 in the Peach State, and three of the four were outside the metro Atlanta area. Moody’s cited nurse and physician shortages, rising numbers of uninsured and Medicaid patients, and the high concentration of a few large health plans as stressors on Georgia’s rural hospitals. 

“We expect rural healthcare providers across the U.S. will be challenged by similar issues,“ the authors wrote.

Although Georgia is a high-growth state, it has the fourth largest number of uninsured in the country and ranks fifth among all states in the number of rural people living in poverty, said Carie Summers, vice president of healthcare financing at the Georgia Hospital Association. 

“Additionally, one of every two patients receiving care at a Georgia rural hospital is covered by either Medicare or Medicaid,“ Summers said in an email. “These payers reimburse hospitals at less than cost, meaning hospitals lose money when they treat patients covered by these types of insurance.”

Georgia is one of 18 states that have chosen not to expand Medicaid under the ACA, according to the Kaiser Family Foundation. 

Georgia faces additional pressure in the near to long term, Summers said. 

“Medicare cuts from the ACA and subsequent federal legislation will ultimately reduce Medicare revenue for Georgia rural hospitals by 14 percent by 2027,” she said. “Medicaid Disproportionate Share funds, an important fund source to subsidize uncompensated care in rural hospitals, will be cut by almost 50 percent by 2021.”

Factors Behind Upgrades

Among the 12 hospitals or health systems that received upgrades last year, common characteristics were volume increases, effective expense strategies, and strong investment returns, according to Moody’s. In the cases of Bethesda Healthcare System in Florida and Baptist Health South Florida, the upgrades followed a merger between the organizations. However, mergers and acquisitions had a mixed effect on credit quality. 

Overall, Moody’s affirmed credit stability in the NFP sector, with 85 percent of entities affirmed each year, on average. But Moody’s previously downgraded the sector from stable to negative in its year-ahead outlook for 2018.

Rebecca Vesely is a freelance writer in San Francisco. Follow her on Twitter @rebvesely


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