Moody’s Investors Service recently released two of its Sector-in-Depth reports that may be of interest to our subscribers. One focuses on how quality-based reimbursement affects financial performance, and the second discusses hospitals’ issuing debt to fund pensions. Brief summaries appear below. The full reports will be published with our next course in January.
Financial Impact of Value-Based Payment
“As reimbursement moves away from fee-for-service to an emphasis on value and outcomes, a hospital’s ability to improve quality of care and the patient experience will increasingly impact its financial performance,” wrote Moody’s Investors Service analysts in their recent report.
These analysts reviewed CMS data and found, for example, that hospitals with stronger value-based payment and patient experience scores posted significantly higher operating cash flow margins. They also noted that large hospitals “do not necessarily have an advantage in a value-based reimbursement environment.” (Quality-Based Reimbursement Will Increasingly Impact Financial Performance, Moody’s Investors Service Sector-in-Depth, October 7, 2016)
A summary follows:
- Above-average VBP and patient experience scores correspond to stronger financial performance. Hospitals with above-average value-based payment (VBP) scores in 2015 had a median operating cash flow margin of 11.7 percent, well above the 8.6 percent for below-average performers. The correlation will likely continue as government and commercial payers shift from fee- for-service to VBP, where the patient experience is a component.
- Despite fewer resources, small hospitals have a higher percentage of above- average VBP scores than larger ones. Small hospitals are performing well in VBP scores, even as larger hospitals have advantages in their ability to treat more complex illnesses and a larger patient base.
- Higher patient experience scores are correlated to newer facilities, or a lower age of plant. Investments that improve the patient experience and quality of care will become more important as consumer choice grows. Private patient rooms, comprehensive ambulatory centers and new technology will likely improve the patient experience.
Incentive to Issue Debt to Fund Pension Liabilities, But May Be Credit Negative
“Low borrowing costs and rising premiums owed to the federal government’s pension guarantee agency (Pension Benefit Guaranty Corporation, PBGC) provide growing incentive for not-for-profit hospitals to issue debt to fund pension liabilities,” wrote Moody’s analysts in a recent report.
This creates a new fixed obligation in lieu of the corresponding pension liability that would otherwise fluctuate over time. This can be negative for the hospital’s credit, especially if the assumptions used in justifying the issuance are aggressive. (Hospitals Increasingly Issuing Debt to Fund Pensions, Moody’s Investors Service Sector-in-Depth, October 17, 2016)
A summary of the report follows:
- Rising PBGC premiums and low interest rates make it attractive to issue debt to fund pensions. Hospitals following Financial Accounting Standards Board (FASB) accounting (private, 501c3 hospitals) are most likely to issue debt as they are paying higher PBGC premiums on the unfunded pension liability and are recording growing liabilities due to falling discount rates.
- Pension funding bonds solidify a fluctuating liability and create credit negative elements. As hospitals consider issuing bonds to fund a rising pension liability, they will need to make assumptions around future interest rates and other capital spending needs. Pension funding bonds have credit negative elements because by issuing debt a system assumes its assumptions around discount rates, investment returns and rising premiums will pan out. If the assumptions do not work out as planned the system ends up with hard debt that they have to pay and more unfunded liabilities than expected, which equates to future budget risk.
- Issuers have other options to address large pension burdens. Hospitals can opt to close the plan to new employees, freeze accrual benefits to existing employees or make other changes that lower the projected benefit obligation.
(iProtean once again thanks Moody’s Investors Service for permission to quote liberally from its publications.)
iProtean subscribers, the advanced Finance course, Driving a Sustained Culture of Quality, What Works, What Doesn’t, featuring Larry McEvoy, M.D., and Stephen Beeson, M.D., is in your library. As always, Drs. McEvoy and Beeson take a cutting-edge view of the board’s role in overseeing quality—beyond the traditional processes and structures where boards customarily focus their oversight responsibilities.
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