December 18, 2019

Moody's Investors Service in a new report said nonprofit hospitals should see an increase in revenue in 2020, upgrading the sector to a stable outlook.

Stabilizing market

Moody's upgraded its outlook for the nonprofit hospital sector from negative to stable, predicting that nonprofits will see 2% to 3% growth in operating cash flow next year and an increase in revenue of 4% to 5%.

Moody's said the growth will be driven by increases in Medicare and commercial reimbursement rates, as well as patient volume growth.

Hospital consolidation also is expected to increase next year, Moody's predicted, as hospitals look to gain "negotiating leverage with commercial insurers, achieve savings through economies of scale, and ensure a foothold in emerging offerings such as urgent care and telemedicine."

Hospitals likely to face financial challenges in 2020

However, the market is still likely to face significant challenges, according to Moody's.

The report noted that aging baby boomers are likely to continue to shift from commercial plans to Medicare, and rising costs of health care coverage could push more individuals into lower-cost and less comprehensive health plans. 

Moody's also noted that hospitals face several legislative, regulatory, and judicial risks in 2020. For instance, Moody's noted that some hospitals could be harmed by HHS' proposals that hospitals post prices negotiated with insurers, while others could benefit. Cuts to the 340B Drug Discount program, which generated an average savings of nearly $12 million for hospitals in the United States last year, also could hurt the nonprofit hospital sector, according to Moody's.

In addition, Moody's said that any potential changes to the Affordable Care Act (ACA) could have significant impacts on the sector. A lawsuit challenging the constitutionality of the ACA is currently pending before a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit, and analysts ultimately expect the case to make its way to the Supreme Court.

"An adverse ruling [in the Supreme Court] would have painful implications for hospitals if millions of individuals lose insurance," Moody's analysts said, adding that "coverage gains from Medicaid expansion would likely be lost."

According to Healthcare Dive, if the ACA were to be declared unconstitutional, an estimated 20 million Americans would lose health insurance, and premiums would increase for millions more consumers (Pifer, Healthcare Dive, 12/10; Paavola, Becker's Hospital CFO Report, 12/9).

Advisory Board's take

Christopher Kerns, Executive Director and Emily Connelly, Senior Consultant

The outlook change from negative to stable is certainly welcome news amid the continued financial pressure and political and regulatory uncertainty surrounding hospitals and health systems. After two years of expense growth significantly outpacing revenue growth, hospitals have been able to bring cost growth back toward a more sustainable rate.

That said, margins are still slim for the vast majority of hospitals and health systems, and the outlook upgrade does not change the fundamental headwinds facing the industry. In fact, the stable outlook likely has less to do with confidence in hospital performance on cost control and more to do with the return to reasonably strong Medicare reimbursement growth.

Earlier this year, CMS in the FY 2020 Inpatient Prospective Payment System (IPPS) finalized the strongest rate update in a decade. FY 2020 will be the first year the ACA-mandated market basket reductions will not apply and, despite the persistence of the multifactor productivity adjustment, the required ATRA add-back does more than enough to offset it.

Hospitals and health systems should not lose sight of their cost control and revenue growth goals amid generous Medicare reimbursement. Other revenue pressures—including the outmigration of care, an increase in commercial denials, payer and case mix shifts, and value-based payments—will certainly persist.

Click here to learn more about what was finalized in the FY 2020 IPPS rule and here to learn about the CY 2020 Hospital Outpatient Prospective Payment System (HOPPS) final rule.

Slide deck: IPPS final rule Slide deck: HOPPS final rule