Note: iProtean will take a short holiday over the Labor Day weekend. Look for the next post on September 9.
Things appear to be looking up for U.S. hospitals and health systems. Moody’s Investors Service has revised the outlook for business conditions from negative to stable, signaling “an expectation of aggregate improvement despite continued headwinds.”
The analysts noted that the revision to stable “expresses our view that fundamental business, financial and economic conditions for the not-for-profit and public healthcare sector will neither erode significantly nor improve materially over the next 12 to 18 months.” (Not-For-Profit Healthcare Outlook Stabilizes; Cash Flow Buffers Long-Term Pressures, Moody’s Investors Service, August 26, 2015)
Moody’s analysts attributed the revision to:
- Significant gains in the number of people with insurance
- Growing patient volumes
- Sizeable reductions in bad debt
Key points in the argument include:
Operating cash flow growth: is at a multi-year high following several years of little to no growth.
- The number of patients with insurance has grown, reducing bad debt expense and increasing the share of paying patients.
- Patient volumes have returned to growth after years of decline.
- Multiple years of good expense control are contributing to cash flow growth.
Moderation of cash flow growth: temporary and one-time factors such as Medicaid expansion and volume gains pushed recent growth.
- Recent factors are unlikely to repeat: number of insured has ramped up and will begin to taper off; patient volumes increased by a heavy flu season.
- As a result of the temporary and one-time factors, the bar has been reset, representing a much faster cash flow growth than has been historically achieved.
Long-term risks: reimbursement pressures remain but are outside the 12-18 month outlook horizon.
- Investments in population health will put pressure on margins. Strategies that lower hospitalization and use of expensive medical services will result in lost revenue unless hospitals successfully enter into risk-sharing contracts or make investments that lower cost settings.
- Exposure to government programs is growing, and government insurance reimburses at rates lower than commercial insurance, thus pressuring margins.
- Changes in patient behavior (consumerism), regulation and insurer consolidation are on the horizon.
The analysts noted that the outlook could change to positive if the operating environment continues to improve and hospitals/systems experience above-average growth in operating cash flow. However, it could change to negative if the expected growth in cash flow is below medical inflation.
Consumerism: Strategic and Financial Implications, Part Two is in your library now. In this course, Mark Grube (Kaufman Hall), Marian Jennings (M. Jennings Consulting) and Nathan Kaufman (Kaufman Strategic Advisors) discuss organizational characteristics for a retail strategy, the financial implications and “must-do’s” for hospitals and systems. And coming up in late September, part one of Integrating Population Health into Your Strategic and Financial Plans.
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