S&P: Nonprofit Hospitals to Experience Big Negative Pressures Next Year

Negative trends may catch up to nonprofit hospitals and health systems in a big way next year, as Standard & Poor's Ratings Services said their outlook is "decidedly negative" for 2014.

In 2008, the entire U.S. economy was sent into a tailspin, due in large part to the collapse of the country's financial institutions. Hospitals and health systems were affected immediately in the aftermath as investment returns and operating margins went south for many. The sector has rebounded, with hospitals boosting their cash flow and gaining manageable profits again, but S&P sees a plethora of pressures that will hurt providers' bottom lines.

S&P said downgrades accelerated in 2013, and upgrades are now few and far between. Additionally, most of S&P's upgrades were due to lower-rated credits merging or affiliating with larger, higher-rated credits, a trend that will likely persist. S&P also noted more providers posted operating losses due to weak volumes and major investments in physician recruitment and health IT. Balance sheet metrics were still sound, overall, for hospitals and health systems this year and in 2012, but S&P predicts downgrades will continue to exceed upgrades "because cutting costs to meet revenue pressures is getting more difficult."

Other trends working against hospitals and health systems next year include the transition to value-based reimbursement, more risk-based contracting, health insurance exchanges, the two-midnight rule, cuts to Medicare and volatility associated with Medicaid, especially for providers in states where the program will not be expanded.

"Although we believe that many hospitals and health systems will manage effectively during this period of change and reform, even the strongest hospitals are, at best, only likely to hold existing margin and liquidity levels," S&P analysts said in their summary report. "Weaker providers will likely see ongoing margin compression and eventually balance sheet pressure leading to rating deterioration. Overall we expect operating performance to decline, with some acceleration in the number of downgrades versus upgrades in the year ahead."

For-profit hospital systems are not immune to these pressures either, S&P said. Margins for the big chains have taken hits over the past couple years due to poor volumes, and those companies will have to work hard to ensure their financials do not continue to trend downward.

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