Moody's: Not-for-profit hospitals have 'stable' outlook even with ACA uncertainty

ACA reform could change the outlook

Moody's Investor Service this week maintained a "stable" outlook for U.S. not-for-profit and public hospitals over the next 12 to 18 moths, citing "strong" top-line revenue growth alongside rising costs that will depress total operating margins.

The forecast, which broadly assesses the credit worthiness of U.S. not-for-profit and public hospitals, projects that the sector will have between 0 and 1 percent operating cash flow growth over the next 12 to 18 months. Moody's said that increases in patient volume and revenue growth will be sufficient to offset "pressures from rising drug costs, pension liabilities, and employment expenses."

Specifically, Moody's anticipates patient volume growth will hold stable at 1 percent and that top-line revenue growth will hit between 3.5 and 4.5 percent.

"Following two years of extraordinary growth associated with expansion under the Affordable Care Act (ACA), hospital operating cash flow has moderated," Moody's VP Eva Bogaty said. "Top-line revenue growth continues to be strong, but constrained increases in reimbursement rates and rising expenses will counteract that growth."

The forecast "incorporates the expectation of some near-term uncertainty around the future of the Affordable Care Act," according to a Moody's release. Moody's said that Donald Trump's election as president "adds uncertainty" but has "no clear immediate credit impact." However, the report cautions that any ACA reforms or repeal plans are likely to increase the uninsured rate and negatively affect not-for-profit hospitals, health care service providers, and medical device suppliers. 

Details of cost pressures

Moody's identified several areas of rising costs that are putting pressure on operating margins, including increases in:

  • Bad debt;
  • Capital expenses associated with the transition to value-based care;
  • Pharmaceutical costs; and
  • Salary and benefit expenses.

However, the report noted that many hospitals view IT investments in patient and insurance billing as "necessary preparation to accommodate future changes to reimbursement models." And Moody's anticipates that such investments should "improve longer term margins."

Moody's said increases in bad debt are driven by factors such as disruption in the ACA exchanges, rising copayments and deductibles, and certain states choosing not to expand Medicaid (Bogaty et al., Moody's Investor Service report [not publicly available], 12/5;  Ellison, Becker's Hospital CFO, 12/5; Moody's release, 12/5).

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