Moody’s Investors Service 2017 Outlook for not-for-profit and public healthcare predicts stability over the next 12 to 18 months.
Its analysts base projections on 0 to 1 percent operating cash flow growth and solid patient volume and revenue growth. Technology and operational investments, however, will continue to bring pressure on hospitals and systems.
However, Moody’s analysts note mixed results from “any change in federal policy regarding Medicaid expansion and the Affordable Care Act without a well-defined replacement policy, with much near-term uncertainty.” (2017 Outlook – Volume and Revenue Growth Drive Stability, But Operating Pressures Persist, Moody’s Investors Service Outlook, December 5, 2016)
Detail appears below:
- Operating cash flow will grow 0-1 percent over the next 12-18 months. Operating cash flow growth is moderating but remains positive after two years of extraordinary growth associated with Medicaid expansion under the Affordable Care Act. Top-line revenue growth is strong, but constrained reimbursement rate increases and rising costs will temper that growth. Operating cash flow growth recently peaked in fiscal 2015 when the sector experienced the one-time positive effects of individuals gaining insurance coverage for the first time and accessing healthcare services. Growth at those levels would be difficult to maintain.
- Patient volume growth is stable at about 1 percent. With the percentage of the population that is uninsured leveling at around 11 percent over the last year, growth in healthcare utilization will be more modest in the future. However, the growth will be sufficient to drive continued top-line revenue growth of 3.5-4.5 percent.
- Hospital affiliations can drive volume growth and will remain prevalent. The rapid pace of mergers, acquisitions and strategic partnerships reflects larger systems’ general expansion strategies to increase size and scale. The flurry of affiliations is also a response to market pressures, which include increased stress on reimbursements from governmental and commercial payers, and the threat of consolidation among insurance companies (which reduce hospitals’ pricing power).
- Expenses are on the rise, compressing margins. Hospitals continue to juggle rising pharmaceutical costs, growing bad debt and additional salary/benefit expenses with growing employment and increased pension costs. Hospitals have been employing more physicians and acquiring physician practices in an effort to manage the transition to population health strategies, such as the introduction of value-based and risked-based models. Employing a greater number of physicians typically leads to lower profitability, and population health strategies require significant technological investment that can also drive down margins. In addition, drug costs continue to rise; high barriers to entry for pharmaceuticals are leading to significant price increases.
- Bad debt is rising as expected. Healthcare exchange disruption and the increased exodus of insurers will contribute to higher bad debt and healthcare costs. After falling for several years as more patients gained insurance, bad debt is again on the rise, particularly in non-Medicaid expansion states. Rising co-pays and high deductibles for employer health plans are also driving increased costs and bad debt, regardless of whether a state expanded Medicaid. Insurance premiums have increased significantly for plans sold on the public exchanges due to the large losses that insurers have incurred in this market. A variety of reasons are driving these losses, including rule changes that removed a number of healthier individuals from the risk pool and the non-payment of risk-corridor funds owed to insurers (these payments were intended to protect insurers from excessive losses in the first three years of the exchange’s operation). These losses have resulted in the large national insurers exiting a number of markets and the closure of many money-losing non-profit insurance co-ops.
- What could change the outlook. Analysts would consider changing the outlook to positive if they expected sustained operating cash flow growth above 4 percent over a 12-18 month period, after accounting for healthcare inflation. They note they would consider changing the outlook to negative if they expected weakening business conditions leading to flat or negative operating cash flow, after inflation. Any major regulatory changes or disruption of current policy could pressure the outlook.
(iProtean once again thanks Moody’s Investors Service for permission to quote liberally from its 2017 Outlook.)
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