March 24, 2020 Read Advisory Board's take: Why nonprofit hospitals' near-term outlook is so uncertain

Moody's Investors Service in a report released last week downgraded the financial outlook for nonprofit hospitals from stable to negative, mostly due to the new coronavirus' projected financial strain on hospitals, Jeff Lagasse reports for Healthcare Finance News.

The outlook for nonprofit hospitals

At the end of 2019, Moody's said nonprofit hospitals should expect see an increase in revenue in 2020, and upgraded the sector to a stable outlook.

However, in the new report, Moody's reversed course.

Moody's said nonprofit hospitals in 2020 will likely see less cash flow than they did in 2019 as a result of many hospitals cancelling profitable elective procedures and stopping other services to prepare for a surge in cases of COVID-19, the disease caused by the new coronavirus. However, Moody's said it would be hard to predict a specific range of cash flow decline, given the erratic nature of the coronavirus epidemic.

In addition, Moody's said that expenses for nonprofit hospitals will rise, as staffing and supply costs increase in response to the epidemic.

Moody's assumed that by the second half of 2020, the new coronavirus will be somewhat contained and that the economy will start to recover.

However, Moody's cautioned that there is an elevated risk of a severe economic impact on nonprofit hospitals given the nature of the epidemic. Even after the new coronavirus is contained, there will be lingering effects that can drive lower cash flow, Moody's said. Examples of these effects include a value reduction among hospitals' investment portfolios and the potential for loss of health benefits among patients, due to growth in unemployment.

These cash flow difficulties will exacerbate existing cash flow constraints on nonprofit hospitals, Moody's said.

Moody's also found that short-term debt risks will increase as a result of market disruptions, which means that constraints on revenue and expenses is likely to continue during the epidemic and immediately afterward.

Moody's said that most hospitals should be able to weather the new coronavirus epidemic but that multi-hospital systems are more likely to manage the epidemic well than smaller hospitals.

The outlook for the pharmaceutical industry

Meanwhile, Moody's found that the development of any new pharmaceutical products to treat COVID-19 could have positive implications for the pharmaceutical industry.

However, Moody's noted that the revenue potential of any new products is difficult to estimate given the number of unknown variables, including how long and severe the epidemic will be, whether pharmaceutical companies will be able to scale up manufacturing, and the price of the products.

While the development of a treatment for COVID-19 could improve the pharmaceutical industry's overall reputation and increase revenue, Moody's noted that the industry does face considerable risk related to the new coronavirus, including disruption to product and supply chains and loss of employees (Lagasse, Healthcare Finance News, 3/20).

Advisory Board's take

Why nonprofit hospitals' near-term outlook is so uncertain

Christopher Kerns, Executive Director

Moody's analysis for nonprofit hospitals, in my opinion, is essentially sound. The negative outlook stems more from uncertainty rather than absolute downward pressure on financial performance. The three biggest near-term risks to hospitals and health systems are:

  • Deteriorating service mix as hospitals are potentially overwhelmed with COVID-19 cases, causing a cancellation of profitable elective surgeries;
  • Increased costs as providers compete for scarce labor and supply resources
  • Overall deterioration in payer mix as the economic fallout causes widespread increases in unemployment

But all of these scenarios come with a series of caveats. While it's certainly true that near-term service mix will weigh more heavily toward less-profitable medical cases, it's also likely that those cases will cause a surge in utilization, and it's possible that a number of those canceled elective surgeries might merely be postponed until the second half of the year. The increases in labor costs are likely to be at least partially offset with federal and state assistance as governments scramble to support the delivery system over the next few months. And while the economic disruption is by far the most significant risk to hospital and health system financial performance, it is unclear just how long the lockdown will occur.

The bottom line is that the near-term outlook for now is quite uncertain. Providers do indeed face a host of negative forces in the near term, but the degree of impact is very much subject to how events play out over the next few weeks. The more interesting question, in our opinion, is how current events change the long-term structure of the industry. How much bed capacity should the U.S. sustain? Is the current outbreak a watershed moment for telehealth and A.I. adoption? How will current efforts change how voters view how health care is financed? These are questions with profound implications for the entire industry—and the initial shape of those answers will likely start to emerge in the next few weeks.

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