iProtean—Negative Outlook Continues for 2013

The outlook for U.S. not-for-profit hospitals remains negative for 2013 according to Moody’s Investors Service.  Its recent Industry Outlook (January 22, 2013) cites continued erosion of hospital revenue and a “tepid economy that dampens demand” as the primary factors in its assessment.  Revenue growth will remain positive but will continue to decelerate because of Federal cuts to healthcare spending and limited reimbursement increases from commercial healthcare insurers, according to the authors of the report.


Moody’s went into detail with three categories of reimbursement cuts:  cuts per unit of service, methodological changes and supplemental payment cuts:


Reductions in rates per unit of service:  Hospitals have historically managed reduction in reimbursement rates by controlling expenses and increasing rates in other higher value services.  But over the next several years Moody’s expects smaller annual increases from Medicare as well as reductions in commercial fee-for-service rates that will not/cannot be offset by other increases.


Methodological changes:  These are broad changes in how hospitals are reimbursed; for example, bundled payments, value-based purchasing and reclassification of short stay admissions to observation stays.  While these programs seek to increase efficiency, reward quality and avoid over utilization of services, the end result is “lower revenue growth and, in many cases, lower absolute revenue.”


Supplemental payments:  These payments rely on volumes of patients meeting certain criteria rather than actual services provided.  The most notable are disproportionate share payments (DSH) from Medicare and Medicaid to hospitals with larger than average numbers of uninsured patients.  DSH payments will be reduced significantly over the next several years:  Medicare DSH by 75% beginning October 1, 2013 (additional funding from CMS may be available, however) and Medicaid DSH by 50% by 2019, with the first cuts beginning October 1, 2013.


Hospitals have begun to experiment with new reimbursement methodologies in an effort to mitigate the negative pull on revenue.  New reimbursement methodologies share the common theme of tying reimbursement to factors other than volume and discouraging readmissions and over utilization of services/procedures.   Moody’s notes significant risk when transitioning to new reimbursement methodologies:

  • Improperly priced contracts that do not provide sufficient reimbursement
  • Overinvestment in vertical integration through acquisition of physician practices and insurance companies
  • Insufficient patient education and risk of declining patient satisfaction as care modalities change
  • Managing two very different payment methodologies simultaneously


There will be positive trends that reduce the impact of the negative credit factors.  These include the ability of hospital management to “actively generate favorable financial performance over the last several years” and the strategic decisions by hospital board and management teams to “engage in mergers, affiliations, and other collaborations” that may improve operating performance in the future.


(“U.S. Not-For-Profit Healthcare Outlook Remains Negative for 2013: Ongoing Challenges Outweigh Stable Operating Performance,” Moody’s Industry Outlook, Moody’s Investors Service, January 22, 2013.)


iProtean experts Lisa Goldstein (Moody’s Investors Service), Daniel Grauman (DGA Partners), Marian Jennings (M. Jennings Consulting) and Nathan Kaufman (Kaufman Strategic Advisors) discuss the reimbursement implications under the new payment systems in two upcoming advanced courses:  Transforming Your Organization to an Integrated Delivery System (released in January) and Financing Considerations for Integrated Delivery Systems (will be released in February).  iProtean subscribers will find new courses in their library as courses are released.


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