December 18, 2020

Our take: Moody's has a grim outlook for nonprofit hospitals. (But some hospitals are better prepared than others.)

Daily Briefing

    Moody's Investors Service in a report released last week said it has a negative financial outlook for nonprofit hospitals for 2021, as hospitals likely will continue to see constrained revenue and rising expenses because of America's coronavirus epidemic.

    The CFO’s guide to navigating federal funding sources of Covid-19 relief

    Moody's outlook for nonprofit hospitals

    Moody's predicted that nonprofit hospitals' median absolute levels of operating cash flow will decline by about 10% to 15% in 2021 when compared with Moody's annualized estimate from the third quarter of 2020. According to Moody's, that decline likely will stem from reduced demand for some health care services because of patients' fears of being exposed to the novel coronavirus.

    Moody's said it expects that trend to persist until America's coronavirus epidemic "is contained and there is widespread use of a vaccine." The report states, "Our outlook assumes it is unlikely that an effective vaccine will be widely available before the middle of 2021."

    In addition, Moody's predicted that hospitals will experience cash-flow constraints tied to patients seeking treatment in lower-cost settings and increased use of telehealth, which is a trend that began before the epidemic, according to Moody's. At the same time, hospitals likely will see swells in labor and supply costs, particularly amid Covid-19 caseload surges, Moody's said.

    Further, Moody's expects that hospitals will see an increase in uninsured patients, as well as patients enrolled in Medicaid, as unemployment remains elevated because of the epidemic and people lose their employer-sponsored health plans. As Moody's notes, employer-sponsored plans typically are more profitable for hospitals when compared with government payers, so this change could further constrain revenue. In addition, Moody's predicts that hospitals will continue to see a larger share of patients enrolled in Medicare plans, as more Americans age into the program.

    Some nonprofit hospitals are better positioned to weather the constraints than others

    According to Moody's, "[l]arge, multi-state [health] systems and/or those with strong cash cushions will be better positioned to resume growth and capital spending" in 2021. Meanwhile, smaller, independent hospitals could be more likely to consider partnering with other entities, which could accelerate mergers and acquisitions in the industry, Moody's said.

    Overall, Moody's predicted that financial "[r]ecovery will vary by region," and be associated with coronavirus "containment levels and widespread administration of vaccines."

    What could change Moody's projection?

    Moody's noted that several factors could change its outlook for 2021.

    For one, judicial, legislative, and regulatory activities could affect the financial outlook for nonprofit hospitals. Specifically, Moody's said, "If the Supreme Court overturns the Affordable Care Act, in the absence of a replacement plan, hospitals stand to lose revenue as millions of people lose coverage."

    In addition, changes to prescription drug pricing could affect hospitals' finances, particularly for 304B hospitals. Planned cuts to Medicaid's disproportionate-share hospital payments also could harm hospitals, while impending price transparency changes likely "will have a mixed effect," Moody's said.

    Moody's also noted that, while it doesn't appear that hospitals are likely to see their cash flow increase in 2021, 0% to 4% growth in operating cash flow would change Moody's outlook from negative to stable (Ellison, Becker's Hospital CFO Report, 12/14; Moody's release, 12/11; Moody's report, 12/11 [subscription only]).

     

    Advisory Board's take

    The pandemic will create 'winners' and 'losers'

    Christopher KernsBy Christopher Kerns, Vice PresidentExecutive Insights

    Moody's financial outlook for hospitals and health systems is hardly surprising, given the headwinds facing the hospital sector. Continued volume suppression (either from mandated lockdowns or crowding out) of providers' most profitable cases (inpatient and outpatient surgeries) is bound to place huge pressure on hospital cash flow. The prospect of significantly less government relief than in 2020 is also unsurprising: hospitals may still face many of the same consumer fears, but they are unlikely to find themselves in such a prolonged state of lockdown as they were in spring 2020. And on balance, like much of Moody's analysis, the assessment is sound.

    But while looking at the sector in aggregate can be helpful to gauge the general investment potential, it obscures tremendous variation. Hospitals and health systems that have been able to embrace the site-of-care shift to more ambulatory settings are much better poised to maintain volumes, as consumers have less reticence to receive care in non-hospital settings. And those that have doubled down on digital health are well-positioned to increase patient loyalty and compliance, and succeed under value-based payment. Organizations that have protected nurses and physicians—either by taking advantage of emerging risk-based payment models for PCPs, preserving overall compensation, or simply supporting providers' emotional well-being during a period of unprecedented stress—will be much better suited for capturing market share and retaining staff as the dust of the pandemic settles with greater levels of vaccination.

    All of this is a long way of saying there will be winners and losers coming out of the pandemic. Hospitals and health systems that have differentiated themselves with savvy financial management, long-term strategic vision, and essential human compassion—are likely to reap long-term gains. And that's not just limited to the largest, wealthiest, market-dominant organizations. But yes, the wealthy and powerful have a leg up. Also unsurprising.

    The CFO’s guide to navigating federal funding sources of Covid-19 relief
    CFO

    Our funding source navigation tool centralizes the most relevant information on applicable grants, loans, and reimbursement changes to assist health system CFOs increase liquidity through federal funding amidst the pandemic.

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