Hospitals and health systems appear to be stronger and healthier today than three years ago, according to a recent Moody’s Investors Service report, and better prepared to withstand the changes in reimbursement under the Affordable Care Act (ACA).
“Though total debt outstanding has increased since the recession, there has been a notable improvement in three key liquidity and cash flow metrics, including absolute cash balances, cash-to-debt and debt-to cash flow. More liquidity provides a buffer against less revenue per procedure as the industry transitions to a value-based reimbursement system from a long- standing volume-based system.” (“Not-For-Profit Hospitals: Buffered by Strong Liquidity and Cash Flow Metrics,” Healthcare Quarterly, Moody’s Investors Service, July 2013)
Despite the overall improvement in these key metrics, the not-for-profit hospital industry is quickly becoming bifurcated, the author noted. Although healthcare reform will significantly disrupt reimbursement for hospitals of all sizes, those with less than $500 million in revenues are and will be in a weaker position. Smaller hospitals:
- Tend to have less negotiating leverage than larger facilities when contracting with payers and vendors
- Have difficulty recruiting and retaining physicians
- Are less able to afford the comprehensive information technology systems needed to meet new regulatory requirements.
Key Events Affecting Outlook for Not-for-Profit Hospitals
Medicare Trust Fund
Moody’s also noted a credit positive “event” for not-for-profit hospitals: the recent announcement about the extension of solvency of the Medicare trust fund from 2024 to 2026. The primary driver for the extension is lower Medicare spending growth in 2012 and lower spending-per-beneficiary in recent years. (Medicare is the single largest payer for most hospitals—44% of gross revenue on average.)
The new projection reduces the incentive for Congress to make additional cuts to the Medicare program, the author said in a recent Moody’s report, noting that “the propensity of the federal government to cut Medicare reimbursement is a function of the size of the federal budget deficit and the projected solvency of the Medicare Trust fund.”
But in addition to trust fund solvency, Congress may be looking at lower Medicare and Medicaid spending growth over the last three years and the corresponding reduction in healthcare inflation. Spending reductions/cost control and operational efficiencies seen in hospitals in the last three years have contributed to the reduction in healthcare cost inflation (see iProtean blog Health Spending and the Economy, April 30, 2013).
(“Sector Comment: Extending Medicare Solvency Pares Future Cuts: Credit Positive for Not-For-Profit Hospitals,” from U.S. Public Finance Weekly Credit Outlook, Moody’s Investors Service, June 6, 2013)
Large For-Profit Hospital Systems’ Consolidation
Finally, Moody’s noted that Tenet Healthcare Corporation’s acquisition of Vanguard Health Systems, Inc., is a credit negative for not-for-profit hospitals because it increases competition, particularly for small standalone hospitals.
As has occurred in many markets, stronger for-profit operators “disrupt longstanding market dynamics and physician allegiances.” Tenet’s acquisition will give it greater market power, putting smaller hospitals at risk given their challenges with physician retention, lack of negotiating leverage and an inability to achieve savings through economies of scale.
The merger also strengthens Tenet’s ability to make acquisitions of not-for-profit hospitals. (“Tenet’s Acquisition of Vanguard Will Increase Competition Against Not-for-Profit Hospitals,” from Credit Outlook, Moody’s Investors Service, July 1, 2013)
iProtean subscribers, for a refresher on financial analyses related to a hospital’s health and credit rating, see Hospital Financial Statements & Ratios, a foundational course featuring Lisa Goldstein and Marian Jennings. These experts, plus Nate Kaufman, are also featured in two advanced Finance courses slated for publication later this year: Making Difficult Decisions about Programs & Services, a Portfolio Approach Part One and Two.
For a complete list of iProtean courses, click here.
iProtean Symposium & Workshop
Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED). For more information, click here.
For more information about iProtean, click here.