UPDATE 2-US not-for-profit hospitals' outlook negative-Moody's

The outlook for the U.S. not-for-profit healthcare sector remains negative as new uncertainties over Medicare and Medicaid funding and the potential for political gridlock on healthcare reform could worsen the low growth in revenue, Moody's Investors Service said in a report.

"The economic recovery will remain tepid, the transition to new payment methodologies will require significant investment, revenue growth will remain low by historical standards, and reimbursement will remain under pressure from all sources," Moody's analyst Daniel Steingart wrote in the report, which was published on Wednesday.

The report outlined three major risks facing the U.S. not-for-profit healthcare sector. One is the pressure to acquire physician practices and other providers, in order to remain competitive, which may require raising capital.

The second risk is the increasing need to acquire or work with insurers to transition from getting paid each time a patient is treated to new reimbursement methods.

The third risk is the U.S. Supreme Court's decision on the healthcare reform law that allows states to opt out of enrolling more people under Medicaid.

"By limiting the expansion of Medicaid coverage, the ruling blunts the impact of one of the law's few credit positive features," Steingart said.

The unsustainable federal deficit and the rising costs of both Medicaid, the health insurance program for the poor, and Medicare, which covers the elderly, likely will lead to further cuts in both programs, the analyst said. Medicaid and Medicare on average insure about 50 percent of a hospital's patients.

Rising demand for healthcare from the aging baby boomer population and the increased number of new people who will get coverage under the U.S. healthcare reform law will help underpin the sector, Moody's said.

"The single largest credit challenge facing the not-for-profit healthcare industry is low revenue growth," Steingart said.

But other parts of the new federal healthcare law will pressure not-for-profit healthcare providers. The new law slows the growth of Medicare spending, which makes it "a significant long-term negative credit factor," Steingart said.

Fitch Ratings also weighed in on Thursday, saying that investment-grade issuers in the sector exhibited solid financial performance and improved debt service coverage in fiscal year 2011, but they also faced many challenges.

Credits rated below 'BBB' also suffered in 2011 from declines in unrestricted cash and investments, operational income and debt service coverage, Fitch said.

"Providers with size and scale are best positioned in the changing landscape as they have the ability to generate increased operating efficiencies and better resource allocation," said Michael Burger, a Fitch director, in a statement.

The difficulties facing sector were also highlighted in an Aug. 13 report by Standard & Poor's Ratings Services. It said non-profit healthcare providers faced a future of weak finances and growing outside pressures, as a recent spurt of improvements, including stronger balance sheets, begins to wane.

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