Moody’s Investors Service revised its 2018 outlook for not-for-profit and public health care from stable to negative, according to its recent report. It based its revision on its projections that operating cash flow will contract by 2-4 percent over the next 12-18 months.
Revenue growth is under pressure because of very low reimbursement rate increases, an ongoing rise in government payers and a continued shift to high deductible plans. “We expect rapid expense growth to outpace revenue growth with high labor costs, nursing shortages and rising bad debt.” (Not-for-profit and public healthcare – US: 2018 outlook changed to negative due to reimbursement and expense pressures, Moody’s Investors Service, December 4, 2017)
Key points in the report follow:
- Operating cash flow will contract by 2-4 percent in 2018. Operating pressures are accelerating at hospitals because of low revenue growth and untamed expense growth.
- Low reimbursement rates drive slowed revenue growth despite consistent volumes. Hospitals are unable to translate volume increases into stronger revenue growth because of below inflationary growth of reimbursement rates and rising bad debt.
- Expense pressures further compress margins. Nursing shortages, continued physician and medical specialist hiring, as well as technological investments are accelerating expense growth. Bad debt will grow in 2018 with high deductibles, rising copays, and contracting exchange enrollment because of changes in federal marketing.
- Federal policy will have marginal near term direct impact, but continued uncertainty is credit negative. Uncertainty around the Affordable Care Act (ACA) makes it very difficult for hospitals to effectively plan and model long-term strategies. Recent federal tax proposals will also contribute to rising costs for hospitals.
- Heightened operating pressure will drive additional consolidations. The report’s authors noted that mergers and acquisitions will continue at a rapid pace as smaller and more rural hospitals struggle for financial stability.
- What could change the outlook. Resumed operating cash flow growth of 0-4 percent over a 12-18 month period, after accounting for healthcare inflation, could drive a change to stable. A positive outlook could result from expectations of accelerated operating cash flow growth of more than 4 percent after inflation. Long-term resolution of federal policy or positive regulatory changes could result in a change in outlook.
Moody’s releases and updates annual outlooks that indicate its expectations for the fundamental credit conditions driving the not-for-profit and public healthcare sector over the next 12-18 months.
(Source: Not-for-profit and public healthcare – US: 2018 outlook changed to negative due to reimbursement and expense pressures, Moody’s Investors Service, December 4, 2017)
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