Typically, when a credit rating organization releases projections for the upcoming year, the analysis includes a mix of both positive and negative factors. For 2014, however, Moody’s Investors Service analysts hold no punches; they list the negative factors that led them to a categorical negative outlook, and appear to be hard pressed to find any positive elements that could soften the force of the negative drivers.
The prevalence of negative drivers should not be surprising; Moody’s has been writing about these key issues throughout this year. The absence of any mitigating factors, however, seems stark.
The key negative drivers are:
- A second year of slowing of revenue growth
- Contracting margins
- Implementation of the Affordable Care Act
A summary of each of these drivers follows. (Industry Outlook: 2014 Outlook – US Not-for-Profit Hospitals; Revenue growth will decline; Margins to contract on physician and IT investments, Moody’s Investors Service, November 25, 2013)
Slowing of Revenue Growth
“We expect median revenue growth in our rated universe to fall to a range of 3%-3.5% in fiscal 2013, which is much lower than last year’s growth rate of 5.2%. We expect revenue growth in 2014 to remain low.” (Moody’s Industry Outlook)
Revenue growth is slowing for a variety of reasons. The primary factors include:
- Lower Medicare payments, effectively a 1.3% reduction, a function of a low 0.7% annual market basket increase and the 2.0% reduction due to sequestration
- Reduced disproportionate share payments (DSH) that began on October 1, 2013
- Lower inpatient volume and shift to outpatient settings including observation stays, which are reimbursed at a lower level
- Diminished commercial rate increases that range from 0%-5%, far below historical levels
Contracting Operating Margins
“Fiscal 2013 will be the second consecutive fiscal year in which expense growth outpaces revenue growth, a trend we expect to continue in calendar year 2014. We expect the median operating cash flow margin to fall to below 9.0% from 9.5% in fiscal 2012.” (Moody’s Industry Outlook)
The impact on margins will result from multiple factors, the most significant being:
- Growing physician employment by hospitals, which tends to reduce margins due to high physician salaries and other costs
- Significant investments in IT systems including electronic medical records and costs associated with the switch to a new coding system, ICD-10
- Higher costs related to managing different reimbursement models
“Provisions of the ACA that have the most direct consequences on hospitals will be implemented in late 2013 and early 2014, but their effects will be felt over the next 18 months as growth in the insured population proceeds unevenly. There are many unknown variables that make budgeting and strategic planning especially difficult over the near term, including how many people will gain insurance coverage through the public exchanges or with what frequency they will access healthcare services.” (Moody’s Industry Outlook)
For hospitals, the elements of the ACA with the greatest effects over the next 18 months are:
- Lower reimbursement rates from insurance products sold on healthcare exchanges
- Growth in the insured population via the individual mandate and expansion of Medicaid eligibility in states that elect to do so
- Unknown effect of the exchanges on patient volumes and bad debt
- Reimbursement cuts to Medicare and DSH mandated by the ACA
The Alternate View
Although Moody’s analysts did not list any mitigating or positive factors that would/could contribute to the 2014 Outlook, they did note what they termed “The Alternate View.” They acknowledged that some hospitals are resilient and will adapt to rapidly changing patient volumes or other revenue pressures by reducing expenses even further, by returning to increasing revenue cycle efficiency, by renegotiating vendor contracts, by consolidating back office functions to find additional savings. They also noted that consolidation/collaboration can smooth the path to financial stability in some cases.
They concluded their report by speculating on what would have to change in order for the Outlook to be considered “stable.” Please refer to your Resources tab in our latest course, Making Difficult Decisions about Services & Programs: A Portfolio Approach, Part Two for this information—including why Moody’s may rely more heavily on key measures such as operating cash flow margins and exposure to bad debt as indicators of success. For a narrower slice of the prediction for not-for-profit hospitals in 2014, also see a recent Modern Healthcare online article: “Hospitals facing big divide in pro- and anti-ACA states.” (December 2, 2013)
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