For-profit hospital outlook improves to stable, according to Moody’s
- Ongoing federal assistance and expected patient returns following vaccine distributions are expected to boost for-profit hospital finances.
- Ongoing challenges include the shift of some surgeries to outpatient settings.
- Continued COVID-19 surges could reverse the improved outlook.
For-profit hospitals rated by Moody’s Investors Service improved from a negative to a stable outlook on the strength of federal assistance and expected volume rebounds.
Moody’s projects that for-profit hospitals’ EBITDA will grow by a low-single-digit rate over the next 12 to 18 months as patient volumes increase and federal aid and other policies shore up earnings.
“These factors will buoy hospitals even as unusually high levels of acuity begin to moderate, cost pressures rise, and high unemployment causes an adverse shift in payer mix,” a Moody’s report states.
Moody’s expects patient volumes to return to pre-COVID-19 levels in late 2021 or early 2022. That would represent a major improvement from 2020, which is expected to finish with volumes at 85% to 90% of normal levels. Widespread availability of vaccines for the SARS-CoV-2 virus, anticipated by mid-2021, is projected to fuel a return of elective procedures.
“Median same facility adjusted admissions, which declined by 9% during the third quarter, snapped back through September and October but are likely to face speed bumps as COVID-19 cases spike in the winter months,” the report states.
An expected laggard is emergency departments, where patient volumes remained down about 20% in the third quarter.
The federal boost to hospital earnings is expected to continue through the first quarter of 2021. That includes grants from the Coronavirus Aid, Relief and Economic Security (CARES) Act, which included $175 billion for providers, about $50 billion of which remains unallocated.
Other ongoing federal assistance includes:
- A 20% add-on payment for treating Medicare patients with COVID-19
- Relaxed repayment terms for accelerated Medicare payments
- Deferral of half the employer portion of social security payroll taxes until December 2021 and the remaining half to December 2022
However, a CARES Act provision scheduled to expire at the end of 2020 is the suspension of the Medicare sequestration. The deferral effectively paid hospitals 2% more on their Medicare business.
Moody’s found median same-facility revenue for its rated for-profit hospitals increased by 3.6% in the third quarter, although EBITDA increased by just 0.7%.
Other good news for hospital finances was a 2.6% rate increase proposed by CMS for outpatient services for FY21. An estimated 2.9% rate increase for inpatient care was approved for acute care hospitals that participate in the hospital quality-reporting program and are meaningful users of electronic health records.
Financial headwinds remain strong
Major short-term challenges to hospital finances remain, Moody’s said. Those include:
- High unemployment rates
- Increasing costs
- Shifts of services to outpatient settings
- Lower-acuity patients
- Affordable Care Act (ACA) legal jeopardy
Ongoing high unemployment rates threaten to drive adverse payer-mix changes, Moody’s noted. The loss of commercial health plan coverage when jobs are eliminated will lead some to buy coverage on the ACA marketplaces or qualify for Medicaid. That will leave more patients with health plans that pay lower rates compared with employer-provided plans.
Cost control will remain a challenge even as hospitals have undertaken aggressive responses to the pandemic. Those steps have included cost-cutting in labor, supplies and capital expenditures in efforts to maintain cash reserves. However, by the third quarter, much of hospitals’ liquidity was provided by the CARES Act.
“Some hospitals have said that for every lost dollar of revenue, they were able to cut about 50 cents in costs,” Moody’s said. “However, we believe that these levels of cost cuts are not sustainable.”
COVID-19-related costs are expected to undercut hospitals’ operational efficiency.
Another financial challenge is the ongoing shift in surgical procedures to nonhospital sites.
That shift will weaken hospital earnings, particularly for organizations lacking sizeable outpatient service lines, according to Moody’s.
Beyond the lower costs that drive consumers and health plans to outpatient settings, the COVID-19 pandemic may fuel the shift as long as more patients are reluctant to check in to a hospital due to fears of the virus.
Additionally, CMS proposed eliminating 300 musculoskeletal-related services from the inpatient-only list and adding to the list of procedures that can be done in an ambulatory surgery center.
“Over time, this will also drive more highly profitable orthopedic procedures out of hospital inpatient settings,” Moody’s noted.
Revenue per adjusted admission also is expected to decline as patients with lower-acuity issues get more comfortable about returning to hospitals in coming quarters.
Finally, the U.S. Supreme Court is weighing the constitutionality of the ACA and likely will issue a decision around mid-2021.
“Invalidating the ACA could cause profit headwinds and increase bad debt for hospitals,” Moody’s said.
Further outlook changes could be in store
Moody’s said it would return to a negative outlook for the sector if EBITDA looks likely to decline over the next four to six quarters.
“This would happen if hospitals experience material operational disruptions due to surges in lower margin coronavirus patient volumes at the expense of performing more profitable elective surgeries,” Moody’s said.
A positive outlook would occur if EBITDA growth looks likely to exceed 4%.