Healthcare Business Trends

NFP hospital finances improve, Moody’s finds

December 11, 2019 3:20 pm
  • Not-for-profit hospitals’ operating cash flow is expected to improve by between 2% and 3% in 2020.
  • Congress is expected to delay payment cuts to Disproportionate Share Hospitals until late 2020.
  • Commercial health plan rate increases are expected to average in the low single digits.

The financial outlook for not-for-profit (NFP) hospitals has moved from negative to stable due to improved revenue and delayed Medicaid cuts, according a rating agency.

Moody’s Investors Service issued a report this week that concluded over the next year to 18 months NFP hospitals’ operating cash flow will increase by between 2% and 3% due to Medicare and commercial payment rate increases and growth.

Despite slowing increases in patient volumes, hospitals are expected to benefit from tighter expense management.

Hospitals with large indigent patient populations also are expected to benefit from the expected continuation of a delay — until late 2020 — in Affordable Care Act (ACA) cuts to Medicaid Disproportionate Share Hospital payments.

Financial headwinds in 2020, according to the report, could include:

  • Increases in labor costs
  • A new requirement to post rates negotiated with insurers
  • Legal challenges to the ACA (and the coverage it authorized)
  • Efforts to rein in drug prices, leading to a reduction in income for 340B-eligible hospitals
  • Shifts in case mix from commercial insurance to Medicare
  • Increases in the numbers of underinsured due to price increases

Medicare revenue boost in store

Hospitals’ Medicare revenue will increase by between 4% to 5% after they receive the largest Medicare payment increase “in years,” the report stated, with the Centers for Medicare & Medicaid Services (CMS) having finalized a 3.1% increase in inpatient rates and a 2.6% increase in outpatient rates for 2020.

Medicare funds a little less than half of hospital patient volumes and a slightly smaller share of revenue.

CMS is expected to continue efforts to cut Medicare payments under the 340B drug discount program and to implement site-neutral payments. Although courts ruled against both cuts, CMS plans to continue the payment reductions in 2020 as it fights to reverse the earlier rulings.

Modest growth anticipated for commercial health plan rates

Increases in commercial health plan rates are expected to largely remain in the “low-single-digit-percentage range,” with significant variation across the country. Projections range from no increases for some local markets to increases in the high single digits for others.

Some hospitals reported seeing increases in payment denials or significant increases in documentation requests by commercial health plans.

The share of uninsured also crept up from a low of 10.6% of the population in 2016 to 13.7% by the end of 2018, which likely was due to the elimination of the ACA’s individual mandate, according to Moody’s.

Other trends that will affect hospital finances

Key factors expected to affect NFP hospitals’ financial performance in 2020 include:

  • The continued success of expense management programs in improving productivity and patient throughput
  • The continued rise of labor costs in certain parts of the country
  • Continued mergers and acquisitions to boost negotiation leverage and economies of scale
  • Reduced revenue from the increasing shift to outpatient settings and the emergence of new competitors
  • An increasing need to demonstrate value to get higher commercial plan rates

Effects of transparency initiatives

The Trump administration finalized requirements for hospitals to publicly post the rates they privately negotiate with health plans and issued proposed rules requiring health plans to do the same.

The financial effects on hospitals, according to Moody’s, will vary based on local market dynamics and consumer responses.

Some health systems can be expected to use the information “to pursue higher reimbursement rates from insurers, arguing that they are underpaid compared with others,” the Moody’s report stated.

Additionally, health plans may use the information to seek lower rates if they find competitors are paying less. They also may use it to steer patients to less costly hospitals.

The rules may lead some patients to “shop” for care depending on how the regulations affect patients’ ability to meet deductibles and other out-of-pocket cost limits.

Although the hospital rate-posting requirement is scheduled to take effect Jan. 1, 2021, hospitals have filed a lawsuit to overturn it.



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