Outlook for not-for-profit hospitals gets first upgrade since 2008

Not-for-profit hospitals are on stable financial ground again after several years of navigating a rocky business environment.

For the first time since 2008, credit rating agency Moody's Investors Service upgraded the outlook on not-for-profit hospitals to stable from negative.

The sector is benefiting from increased patient volume and a reduction in bad debt, which are having a positive effect on operating cash flow, Moody's said in a report Wednesday. The impact is most evident in states that expanded eligibility for their Medicaid programs. In these states, self-pay patients account for only 3.8% of revenue compared with 9.2% in non-expansion states.

Hospitals have struggled with flat or declining admissions since at least 2009, but in late 2014, patients began to return. A virulent flu season, pent-up demand among the newly insured and employment growth all contributed to the increase in volume, Moody's said.

Those factors have buoyed hospitals even in states that did not expand their Medicaid rosters. A Modern Healthcare analysis of not-for-profit hospital finances for fiscal 2014 found that the average operating margin in Medicaid expansion states was 3.2%—not noticeably different from the 3.1% in non-expansion states.

As a result, not-for-profit hospitals are reporting growth in operating cash flow that is at a multiyear high, according to Moody's. Operating cash flow increased 12.3% in 2014, compared with only 0.3% in 2013. It also increased a healthy 11.5% in the first quarter of this year.

The financial improvement is coming not only from the additional revenue hospitals are generating, but from their success in managing expenses on the labor and supply sides, Moody's said.

Yet Moody's cautioned that the uplift—while likely to persist over the next 12 to 18 months—could well be temporary. Hospitals are investing heavily in population health management, and spending large amounts of capital to build lower-acuity care settings, buy physician practices and upgrade their health information technology systems.

In addition, the goals of population health are to decrease utilization, particularly for higher-cost services.

Another challenge is that healthcare providers are facing increased competition from new entrants into the market, such as urgent-care clinics in pharmacies.

“Cost, convenience and access are integral to the patient experience,” Moody's analyst Lisa Goldstein said in a June interview.

Healthcare providers also are becoming more reliant on government insurers. Medicaid now represents 15% of revenue, up from 11.9% in 2009, according to Moody's. Commercial health plans, in contrast, account for 30.5% of revenue, down from 35.8% in 2009.

Medicare, too, is a larger piece of the pie. While aging baby boomers will be good for volumes, they'll put further pressure on Medicare reimbursement rates, Goldstein said.

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