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December 6, 2017

Why Moody's is pessimistic about the outlook for nonprofit, public hospitals

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    Nonprofit and public hospitals will see declines in their operating cash flows over the next 12 to 18 months, according to projections released Monday by Moody's Investors Services.

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    Moody's in the latest report revised its 2018 outlook for nonprofit and public hospitals from "stable" to "negative," marking the first time Moody's has issued a negative outlook for nonprofit and public hospitals in several years, according to Becker's Hospital CFO Report.

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    Moody's VP Eva Bogaty in a statement said, "Operating cash flow declined at a more rapid pace than expected in 2017," and the group predicted that the trend will continue. Nonprofit and public hospitals are projected to see their operating cash flows decline by between 2% and 4% over the next 12 to 18 months, according to the report.

    Bogaty said, "The cash flow spike from insurance expansion under the Affordable Care Act (ACA) in 2014 and 2015 has largely worn off, but cash flow has not stabilized as expected because of a low revenue and high expense growth environment." According to Bogaty, although coverage expansions under the ACA resulted in a decline in hospitals' uncompensated care from 2014 to 2016, hospitals' bad debt increased by 5% in 2017, and Moody's projected that debt will continue to increase by a rate of between 6% and 7% in 2018.

    Further, Moody's said hospital revenue growth has slowed and projected that growth would continue to increase at a rate slightly higher than the rate of medical inflation, which dropped to 1.6% in September. Moody's said hospital revenue growth is slowing because of lower reimbursement rate increases from all insurers. The group predicted that hospital revenue growth would continue to slow because of low reimbursement rates from insurers and insurers scaling back coverage, adding that it could become increasingly difficult for providers to contract with insurers.

    Along the same lines, Moody's said hospital revenue growth could stymie as hospitals become more exposed to government payers—which typically reimburse providers at lower rates than private insurers—as an increasing number of U.S. residents age into Medicare.

    Moody's said hospital revenue growth also has been hampered by an increase in hospitals' expenses, which was driven by:

    • Increasing labor costs associated with a nursing shortage in the United States and ongoing specialist and physician hiring; and
    • Technology costs associated with upgrading IT systems and hiring IT staff.

    According to Moody's, hospitals also are seeing their patient volumes shift away from inpatient operations toward more outpatient care, which, according to Modern Healthcare, tend to have lower margins than inpatient care. Moody's said inpatient revenue currently is growing by a rate of 1%, and that growth likely will plateau next year. In comparison, inpatient revenue grew by a rate of 2.4% between 2015 and 2016, Modern Healthcare reports.

    In addition, Moody's said tax reform proposals currently working their way through Congress ultimately could increase hospitals' costs, as well as uncertainty surrounding the ACA. In addition, according to Moody's, hospitals potentially could be affected by:

    • A reduction in federal outreach for the ACA's current open enrollment period, as well as the open enrollment period's reduced length;
    • Cuts to disproportionate-share hospital payments;
    • Efforts to expand association and short-term health plans.
    • Efforts to repeal the ACA's individual mandate;
    • Reductions to Medicare's 340B drug discount program;
    • The Trump administration's decision to stop paying cost-sharing reductions to insurers called for under the ACA.

    Given the financial pressures facing hospitals, Moody's predicted that hospital acquisitions, mergers, and strategic alliances would continue to occur at a fast pace during 2018, particularly among community and rural hospitals in areas facing Medicaid reimbursement cuts or dwindling competition among private insurers (Lagasse, Healthcare Finance News, 12/4; Ellison, Becker's Hospital CFO Report, 12/4; Bannow, Modern Healthcare, 12/4; Moody's report, 12/4).

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