4 health systems hit with rating downgrades

Here is a summary of recent credit rating downgrades, going back to the last Becker’s roundup on Jan. 17.

Operating concerns and a bleak financial outlook for some resulted in the following changes:

Geisinger Health System (Danville, Pa.): Moody’s Investors Service downgraded Geisinger Health System’s outstanding bonds from “A1” to “A2” Feb. 13 amid expectations of continued cash flow weakness. 

The outlook for the system, which has about $1.3 billion in debt, is stable. 

Marshfield (Wis.) Clinic Health System:  The system suffered a credit downgrade because of recent operating losses and amid expectations of no immediate financial improvement.

The S&P Global move Feb. 7 to downgrade the system to “BBB+” from “A-” follows a similar move from Fitch Jan. 18.

Marshfield signed a memorandum of understanding with Duluth, Minn.-based Essentia Health to discuss a potential merger Oct. 12 that would include 25 hospitals.

Tower Health (West Reading, Pa.): Troubled Tower Health, which is currently undergoing a strategic review and selling off several assets, suffered a rating downgrade on its bonds, S&P Global reported Feb. 6, adding that the outlook is negative.

“The downgrade reflects Tower Health’s significant ongoing operating losses that are expected to continue in fiscal 2023, and a steep decline in unrestricted reserves to a level that we view as highly vulnerable,” said S&P Global Ratings credit analyst Anne Cosgrove.

Fairview Health (Minneapolis): Moody’s Investors Service downgraded the revenue bond ratings of Fairview Health from “A3” to “Baa1.” 

The downgrade reflects Moody’s projection that weak operating performance will be challenging to overcome due to increased labor costs and lower inpatient volume. Inflation and annual transfers to the University of Minnesota in Minneapolis will also hamper margins, Moody’s said.

CHS’ net income drops 51% in 2022

Franklin, Tenn.-based Community Health Systems, one of the largest for-profit health systems in the country, reported $179 million net income in 2022, a 51.4 percent drop from the $368 million net income reported the prior year. 

The drop was driven by a decline in net operating revenues, fewer inpatient admissions and what CHS termed “unfavorable changes” in payer mix.

Total operating costs and expenses for the year ended Dec. 31 were $11.4 billion, up from $11 billion in 2021. Net operating revenues were $12.2 billion in 2022, down slightly from $12.4 billion the prior year. 

Net income in the final three months of the year totaled $446 million compared with $223 million in the same period in 2021.

“We were pleased with our progress during the final quarter of the year, including solid volume growth in admissions, adjusted admissions and surgeries,” CEO Tim Hingtgen said in a statement. “We also significantly reduced contract labor from its peak in early 2022 while improving overall employee recruitment and retention levels.”

CHS, which owns or leases 79 affiliated hospitals with approximately 13,000 beds and operates more than 1,000 sites of care, also released guidance for 2023, predicting annual revenues of between $12.2 billion and $12.6 billion. Such figures compare with $12.2 billion in 2022.

The system, which is also predicting a net loss in 2023 between 0.05 and 0.65 a share, recorded long-term debt of $11.6 billion as of Dec. 31 compared with $12.1 billion at the same time in 2021.

Henry Ford Health reports negative operating margin

Detroit-based Henry Ford Health ended the first half of this year with an operating loss, according to financial documents released Aug. 15. 

In the first two quarters of this year, Henry Ford Health reported revenue of $3.41 billion, up from $3.36 billion in the same period a year earlier. Net patient service revenue and healthcare premium revenue were up year over year. The health system attributed the increase in patient service revenue to higher pharmacy and outpatient volume. 

After factoring in expenses, which grew 4.4 percent year over year, the health system ended the first six months of this year with an operating loss of $74.77 million and an operating margin of -2.2 percent. Henry Ford Health reported operating income of $19.29 million in the first half of 2021. 

Henry Ford Health’s nonoperating loss totaled $272.53 million in the first six months of this year, which was primarily attributed to a significant loss on investments. In the first half of 2021, the health system reported nonoperating income of $134.65 million.

Henry Ford Health closed out the first half of this year with a net loss of $347.98 million, compared to a net income of $153.18 million in the same period of 2021.

Trinity Health’s operating income slips 79% as labor costs soar


Higher labor costs put pressure on Trinity Health’s margins in the first nine months of fiscal year 2022, according to financial documents released May 20. 

Livonia, Mich.-based Trinity Health posted revenue of $15.13 billion in the nine months ended March 31, up from $15.12 billion in the same period a year earlier. The health system said net patient service revenue was up 3.3 percent year over year, primarily because of increased volume and payment rates. 

Patient volumes continue to fluctuate with COVID-19 pandemic surge and recovery waves and patient volumes are returning but have yet to return to pre-pandemic levels,” the system said in an earnings release. 

Trinity Health’s operating expenses for the first nine months of fiscal year 2022 increased by 4.8 percent year over year to $15.12 billion. The increase was attributed to a $679.8 million increase in labor costs. Contract labor expenses increased 154.2 percent during the nine-month period. 

Trinity Health reported operating income of $139.7 million in the first nine months of fiscal year 2022, down 79 percent from operating income of $653.9 million in the same period a year earlier. Operating income in the first nine months of the current fiscal year included a $128.7 million gain on the sale of Gateway Health Plan. 

After factoring in investments and nonoperating items, Trinity posted net income of $43 million for the first nine months of fiscal year 2022, down from $3.19 billion in the same period a year earlier.

Providence posts $306M loss in 2020 after patient revenue takes hit from COVID-19

Providence posts $306M loss in 2020 after patient revenue takes hit from  COVID-19 | FierceHealthcare

Providence Health posted a $306 million operating loss for 2020 as the system’s patient service revenue declined by nearly $1 billion due to COVID-19.

Providence struggled with a major decline in patient volumes, which were down 9% compared to 2019 and led to a 5% decline in net patient service revenue.

While volumes have recovered since an initial decline at the onset of the pandemic, “operational recovery continues to be variable and market-specific as the pandemic continues across our footprint,” the 51-hospital system said in its earnings report released late Monday.

Providence generated $25.6 billion in operating revenue in 2020, slightly above the $25 billion that it generated the year before. However, Providence’s expenses shot up to $25.9 billion, a major spike from the $24.8 billion it paid for in 2019. This led to an operating deficit of $306 million.

A major reason was the system’s response to the COVID-19 pandemic, which Providence got a jump start on as it was the first U.S. hospital system to treat a patient with the virus.

“The impact included a significant reduction in revenue, coupled with an increase in costs incurred for [personal protective equipment] and pharmaceuticals, and increases in labor costs for staffing to serve those impacted by the virus,” Providence’s report said.

Net patient service revenue was $19 billion for 2020, down by nearly $1 billion from the $19.9 billion it posted in 2019.

Providence’s non-operating income totaled $1 billion in 2020 compared to $1.1 billion the previous year. The non-operating income, which is made up of investment gains, helped to “recoup operating losses resulting from the pandemic and offset reimbursement shortfalls from Medicaid and Medicare coverage, allowing us to serve vulnerable populations while balancing our financial standing,” the report said.

Providence’s operating earnings before interest, depreciation and amortization (EBITDA) was $1.1 billion, or 4.4% of its operating revenues. This was a decline from the $1.6 billion (6.2%) in EBITDA for 2019.

The system also got $957 million in relief funding under the CARES Act, which partly offset the losses from lower volumes, the report said.

Providence is an outlier among other larger for and not-for-profit systems that ended 2020 in the black. For instance, Mayo Clinic posted a net operating income of $728 million, helped by $587 million in donations and a massive increase in business from its lab division to help provide COVID-19 tests.

University of Pittsburgh Medical Center also posted a $1 billion profit for 2020 thanks to a boost of enrollment in its insurance business.

Hospital revenue at risk in CMS’ proposal to move joint replacement to outpatient care

https://www.healthcarefinancenews.com/news/hospital-revenue-risk-cmss-proposal-move-joint-replacement-outpatient-care

Hospital revenue at risk in CMS' proposal to move joint replacement to outpatient  care | Healthcare Finance News

The Centers for Medicare and Medicaid Services’ push to move procedures from inpatient to less expensive outpatient care continues, with revenue at risk for lucrative joint replacement starting in 2021.

CMS’s continued push to the outpatient setting has been going on for some time, but the agency has found its sea legs in the recent hospital outpatient prospective payment system proposed rule, according to Stuart Clark, a managing director for The Advisory Board Company, in an August 27 presentation on payment updates.

CMS is slowly phasing out the inpatient only list over the next three years and is adding more services to the ambulatory surgical center list. There’s around 1,400 total codes on the list right now which are expected to be phased out by 2024.

MORE ON REIMBURSEMENT

Hospital revenue at risk in CMS’ proposal to move joint replacement to outpatient care

At stake is $3.2 billion in revenue for a one-day length of stay as 80% of revenue for all services is in joint replacement.

Susan Morse, Managing Editor

 

The Centers for Medicare and Medicaid Services’ push to move procedures from inpatient to less expensive outpatient care continues, with revenue at risk for lucrative joint replacement starting in 2021.

CMS’s continued push to the outpatient setting has been going on for some time, but the agency has found its sea legs in the recent hospital outpatient prospective payment system proposed rule, according to Stuart Clark, a managing director for The Advisory Board Company, in an August 27 presentation on payment updates.

CMS is slowly phasing out the inpatient only list over the next three years and is adding more services to the ambulatory surgical center list.

There’s around 1,400 total codes on the list right now which are expected to be phased out by 2024.

For 2021, CMS has added 11 new procedures to the ASC list, including musculoskeletal services and total hip replacement.

WHY THIS MATTERS 

Eighty percent of hospital revenue for all services is in joint replacement. At stake is $3.2 billion in revenue for a one-day length of stay.

Per hospital, 12-15 procedures may shift from a one-day stay to outpatient, according to Clark and Shay Pratt, vice president of Strategy and Service Line Research for the Advisory Board.

Hospitals may not see a huge amount of revenue at risk if they can continue to keep the services in-house, but in an outpatient setting.

However, there is less revenue to be made from the move to a lower cost care setting. And an estimated 83% of ambulatory surgical centers are physician-owned.

There is still debate on the efficacy of total hip replacement done as an outpatient service. Commercial payers say ASCs can provide total hip replacement, while opponents say they are not equipped for the service, according to the Advisory Board.

The comment period for the proposed rule is set to close on October 5.

Next year, CMS is expected to add cardiovascular services to the outpatient list, but the volume and revenue is not on as large a scale as joint replacement.

THE LARGER TREND IN TELEHEALTH

In telehealth, CMS is implementing incremental change as its use has increased dramatically during the coronavirus pandemic.

For Medicare reimbursement, 22 services have been added to the telehealth list. Of these, nine codes have been added permanently and 13 are approved through the end of the year in which the public health emergency ends.

Audio-only services are eligible under the public health emergency, but CMS is inviting input on how long they should remain eligible. The agency has said it’s uncertain about the value of an audio-only visit.

 

 

 

 

Northwell records $329M loss in first half of 2020

https://www.beckershospitalreview.com/finance/northwell-records-329m-loss-in-first-half-of-2020.html?utm_medium=email

Northwell Health pairs with Israel Innovation Authority to develop new  medical innovations | MobiHealthNews

Northwell Health, a 19-hospital system based in New Hyde Park, N.Y., ended the first half of 2020 with an operating loss despite a revenue increase year-over-year, according to recently released financial documents. 

In the six months ended June 30, the health system recorded revenue of $6.3 billion, up from $6.1 billion reported in the same period in 2019.

The health system saw its patient revenue drop 9.7 percent in the first half of the year to $5.1 billion, compared to the same period in 2019. The patient revenue drop was attributed to the COVID-19 pandemic.

Northwell’s expenses climbed in the first six months of this year to $6.6 billion, an increase of about 9.5 percent from the same period in 2019.

The health system recorded an operating loss of $249.6 million.

After accounting for nonoperating gains and losses, the system ended the first half of 2020 with a $329 million net loss. This compares to a net income of $393 million in the first half of 2019.

Northwell Health estimated that the negative financial hit from the COVID-19 pandemic in the six months ended June 30 was about $1.2 billion and attributed most of the financial impact to lower patient volume.

Through Aug. 28, Northwell has received $1.2 billion in grants from the Coronavirus Aid Relief and Economic Security Act. In the six months ended June 30, the health system recorded $754 million of this relief aid as “other operating revenue.”

“While the financial impact estimates noted above have been made using the best available information at the time, the ultimate net impact of the pandemic to Northwell and its financial condition is uncertain,” Northwell Health stated.

 

 

 

 

The Future of Hospitals in Post-COVID America (Part 1): The Market Response

Click to access CBC_72_08052020_Final.pdf

 

[Readers’ Note: This is the first of two articles on the Future of Hospitals in Post-COVID America. This article
examines how market forces are consolidating, rationalizing and redistributing acute care assets within the
broader industry movement to value-based care delivery. The second article, which will publish next month,
examines gaps in care delivery and the related public policy challenges of providing appropriate, accessible
and affordable healthcare services in medically-underserved communities.]

In her insightful 2016 book, The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore,
Michelle Wucker coins the term “Gray Rhinos” and contrasts them with “Black Swans.” That distinction is
highly relevant to the future of American hospitals.

Black Swans are high impact events that are highly improbable and difficult to predict. By contrast, Gray
Rhinos are foreseeable, high-impact events that we choose to ignore because they’re complex, inconvenient
and/or fortified by perverse incentives that encourage the status quo. Climate change is a powerful example
of a charging Gray Rhino.

In U.S. healthcare, we are now seeing what happens when a Gray Rhino and a Black Swan collide.
Arguably, the nation’s public health defenses should anticipate global pandemics and apply resources
systematically to limit disease spread. This did not happen with the coronavirus pandemic.

Instead, COVID-19 hit the public healthcare infrastructure suddenly and hard. This forced hospitals and health systems to dramatically reduce elective surgeries, lay off thousands and significantly change care delivery with the adoption of new practices and services like telemedicine.

In comparison, many see the current American hospital business model as a Gray Rhino that has been charging toward
unsustainability for years with ever-building momentum.

Even with massive and increasing revenue flows, hospitals have long struggled with razor-thin margins, stagnant payment rates and costly technology adoptions. Changing utilization patterns, new and disruptive competitors, pro-market regulatory rules and consumerism make their traditional business models increasingly vulnerable and, perhaps, unsustainable.

Despite this intensifying pressure, many hospitals and health systems maintain business-as-usual practices because transformation is so difficult and costly. COVID-19 has made the imperative of change harder to ignore or delay addressing.

For a decade, the transition to value-based care has dominated debate within U.S. healthcare and absorbed massive strategic,
operational and financial resources with little progress toward improved care outcomes, lower costs and better customer service. The hospital-based delivery system remains largely oriented around Fee-for-Service reimbursement.

Hospitals’ collective response to COVID-19, driven by practical necessity and financial survival, may accelerate the shift to value-based care delivery. Time will tell.

This series explores the repositioning of hospitals during the next five years as the industry rationalizes an excess supply of acute care capacity and adapts to greater societal demands for more appropriate, accessible and affordable healthcare services.

It starts by exploring the role of the marketplace in driving hospital consolidation and the compelling need to transition to value-based care delivery and payment models.

COVID’s DUAL SHOCKS TO PATIENT VOLUME

Many American hospitals faced severe financial and operational challenges before COVID-19. The sector has struggled to manage ballooning costs, declining margins and waves of policy changes. A record 18 rural hospitals closed in 2019. Overall, hospitals saw a 21% decline in operating margins in 2018-2019.

COVID intensified those challenges by administering two shocks to the system that decreased the volume of hospital-based activities and decimated operating margins.

The first shock was immediate. To prepare for potential surges in COVID care, hospitals emptied beds and cancelled most clinic visits, outpatient treatments and elective surgeries. Simultaneously, they incurred heavy costs for COVID-related equipment (e.g. ventilators,PPE) and staffing. Overall, the sector experienced over $200 billion in financial losses between March and June 20204.

The second, extended shock has been a decrease in needed but not necessary care. Initially, many patients delayed seeking necessary care because of perceived infection risk. For example, Emergency Department visits declined 42% during the early phase of the pandemic.

Increasingly, patients are also delaying care because of affordability concerns and/or the loss of health insurance. Already, 5.4 million people have lost their employer-sponsored health insurance. This will reduce incremental revenues associated with higher-paying commercial insurance claims across the industry. Additionally, avoided care reduces patient volumes and hospital revenues today even as it increases the risk and cost of future acute illness.

The infusion of emergency funding through the CARES Act helped offset some operating losses but it’s unclear when and even whether utilization patterns and revenues will return to normal pre-COVID levels. Shifts in consumer behavior, reductions in insurance coverage, and the emergence of new competitors ranging from Walmart to enhanced primary care providers will likely challenge the sector for years to come.

The disruption of COVID-19 will serve as a forcing function, driving meaningful changes to traditional hospital business models and the competitive landscape. Frankly, this is long past due. Since 1965, Fee-for-Service (FFS) payment has dominated U.S. healthcare and created pervasive economic incentives that can serve to discourage provider responsiveness in transitioning to value-based care delivery, even when aligned to market demand.

Telemedicine typifies this phenomenon. Before COVID, CMS and most health insurers paid very low rates for virtual care visits or did not cover them at all. This discouraged adoption of an efficient, high-value care modality until COVID.

Unable to conduct in-person clinical visits, providers embraced virtual care visits and accelerated its mass adoption. CMS and
commercial health insurers did their part by paying for virtual care visits at rates equivalent to in-person clinic visits. Accelerated innovation in care delivery resulted.

 

THE COMPLICATED TRANSITION TO VALUE

Broadly speaking, health systems and physician groups that rely almost exclusively on activity-based payment revenues have struggled the most during this pandemic. Vertically integrated providers that offer health insurance and those receiving capitated payments in risk-based contracts have better withstood volume losses.

Modern Healthcare notes that while provider data is not yet available, organizations such as Virginia Care Partners, an integrated network and commercial ACO; Optum Health (with two-thirds of its revenue risk-based); and MediSys Health Network, a New Yorkbased NFP system with 148,000 capitated and 15,000 shared risk patients, are among those navigating the turbulence successfully. As the article observes,

providers paid for value have had an easier time weathering the storm…. helped by a steady source of
income amid the chaos. Investments they made previously in care management, technology and social
determinants programs equipped them to pivot to new ways of providing care.

They were able to flip the switch on telehealth, use data and analytics to pinpoint patients at risk for
COVID-19 infection, and deploy care managers to meet the medical and nonclinical needs of patients even
when access to an office visit was limited.

Supporting this post-COVID push for value-based care delivery, six former leaders from CMS wrote to Congress in
June 2020 calling for providers, commercial insurers and states to expand their use of value-based payment models to
encourage stability and flexibility in care delivery.

If value-based payment models are the answer, however, adoption to date has been slow, limited and difficult. Ten
years after the Affordable Care Act, Fee-for-Service payment still dominates the payer landscape. The percentage of
overall provider revenue in risk-based capitated contracts has not exceeded 20%

Despite improvements in care quality and reductions in utilization rates, cost savings have been modest or negligible.
Accountable Care Organizations have only managed at best to save a “few percent of Medicare spending, [but] the
amount varies by program design.”

While most health systems accept some forms of risk-based payments, only 5% of providers expect to have a majority
(over 80%) of their patients in risk-based arrangements within 5 years.

The shift to value is challenging for numerous reasons. Commercial payers often have limited appetite or capacity for
risk-based contracting with providers. Concurrently, providers often have difficulty accessing the claims data they need
from payers to manage the care for targeted populations.

The current allocation of cost-savings between buyers (including government, employers and consumers), payers
(health insurance companies) and providers discourages the shift to value-based care delivery. Providers would
advance value-based models if they could capture a larger percentage of the savings generated from more effective
care management and delivery. Those financial benefits today flow disproportionately to buyers and payers.

This disconnection of payment from value creation slows industry transformation. Ultimately, U.S. healthcare will not
change the way it delivers care until it changes the way it pays for care. Fortunately, payment models are evolving to
incentivize value-based care delivery.

As payment reform unfolds, however, operational challenges pose significant challenges to hospitals and health
systems. They must adopt value-oriented new business models even as they continue to receive FFS payments. New
and old models of care delivery clash.

COVID makes this transition even more formidable as many health systems now lack the operating stamina and
balance sheet strength to make the financial, operational and cultural investments necessary to deliver better
outcomes, lower costs and enhanced customer service.

 

MARKET-DRIVEN CONSOLIDATION AND TRANSFORMATION

Full-risk payment models, such as bundled payments for episodic care and capitation for population health, are the
catalyst to value-based care delivery. Transition to value-based care occurs more easily in competitive markets with
many attributable lives, numerous provider options and the right mix of willing payers.

As increasing numbers of hospitals struggle financially, the larger and more profitable health systems are expanding
their networks, capabilities and service lines through acquisitions. This will increase their leverage with commercial
payers and give them more time to adapt to risk-based contracting and value-based care delivery.

COVID also will accelerate acquisition of physician practices. According to an April 2020 MGMA report, 97% of
physician practices have experienced a 55% decrease in revenue, forcing furloughs and layoffs15. It’s estimated the
sector could collectively lose as much as $15.1 billion in income by the end of September 2020.

Struggling health systems and physician groups that read the writing on the wall will pro-actively seek capital or
strategic partners that offer greater scale and operating stability. Aggregators can be selective in their acquisitions,
seeking providers that fuel growth, expand contiguous market positions and don’t dilute balance sheets.

Adding to the sector’s operating pressure, private equity, venture investors and payers are pouring record levels of
funding into asset-light and virtual delivery companies that are eager to take on risk, lower prices by routing procedures
and capture volume from traditional providers. With the right incentives, market-driven reforms will reallocate resources
to efficient companies that generate compelling value.

As this disruption continues to unfold, rural and marginal urban communities that lack robust market forces will
experience more facility and practice closures. Without government support to mitigate this trend, access and care gaps
that already riddle American healthcare will unfortunately increase.

 

WINNING AT VALUE

The average hospital generates around $11,000 per patient discharge. With ancillary services that can often add up to
more than $15,000 per average discharge. Success in a value-based system is predicated on reducing those
discharges and associated costs by managing acute care utilization more effectively for distinct populations (i.e.
attributed lives).

This changes the orientation of healthcare delivery toward appropriate and lower cost settings. It also places greater
emphasis on preventive, chronic and outpatient care as well as better patient engagement and care coordination.
Such a realignment of care delivery requires the following:

 A tight primary care network (either owned or affiliated) to feed referrals and reduce overall costs through
better preventive care.

 A gatekeeper or navigator function (increasingly technology-based) to manage / direct patients to the most
appropriate care settings and improve coordination, adherence and engagement.

 A carefully designed post-acute care network (including nursing homes, rehab centers, home care
services and behavioral health services, either owned or sufficiently controlled) to manage the 70% of
total episode-of-care costs that can occur outside the hospital setting.

 An IT infrastructure that can facilitate care coordination across all providers and settings.

Quality data and digital tools that enhance care, performance, payment and engagement.

Experience with managing risk-based contracts.

 A flexible approach to care delivery that includes digital and telemedicine platforms as well as nontraditional sites of care.

Aligned or incentivized physicians.

Payer partners willing to share data and offload risk through upside and downside risk contracts.

Engaged consumers who act on their preferences and best interests.

 

While none of these strategies is new or controversial, assembling them into cohesive and scalable business models is
something few health systems have accomplished. It requires appropriate market conditions, deep financial resources,
sophisticated business acumen, operational agility, broad stakeholder alignment, compelling vision, and robust
branding.

Providers that fail to embrace value-based care for their “attributed lives” risk losing market relevance. In their relentless pursuit of increasing treatment volumes and associated revenues, they will lose market share to organizations that
deliver consistent and high-value care outcomes.

CONCLUSION: THE CHARGING GRAY RHINO

America needs its hospitals to operate optimally in normal times, flex to manage surge capacity, sustain themselves
when demand falls, create adequate access and enhance overall quality while lowering total costs. That is a tall order
requiring realignment, evolution, and a balance between market and policy reform measures.

The status quo likely wasn’t sustainable before COVID. The nation has invested heavily for many decades in acute and
specialty care services while underinvesting, on a relative basis, in primary and chronic care services. It has excess
capacity in some markets, and insufficient access in others.

COVID has exposed deep flaws in the activity-based payment as well as the nation’s underinvestment in public health.
Disadvantaged communities have suffered disproportionately. Meanwhile, the costs for delivering healthcare services
consume an ever-larger share of national GDP.

Transformational change is hard for incumbent organizations. Every industry, from computer and auto manufacturing to
retailing and airline transportation, confronts gray rhino challenges. Many companies fail to adapt despite clear signals
that long-term viability is under threat. Often, new, nimble competitors emerge and thrive because they avoid the
inherent contradictions and service gaps embedded within legacy business models.

The healthcare industry has been actively engaged in value-driven care transformation for over ten years with little to
show for the reform effort. It is becoming clear that many hospitals and health systems lack the capacity to operate
profitably in competitive, risk-based market environments.

This dismal reality is driving hospital market valuations and closures. In contrast, customers and capital are flowing to
new, alternative care providers, such as OneMedical, Oak Street Health and Village MD. Each of these upstart
companies now have valuations in the $ billions. The market rewards innovation that delivers value.

Unfortunately, pure market-driven reforms often neglect a significant and growing portion of America’s people. This gap has been more apparent as COVID exacts a disproportionate toll on communities challenged by higher population
density, higher unemployment, and fewer medical care options (including inferior primary and preventive care infrastructure).

Absent fundamental change in our hospitals and health systems, and investment in more efficient care delivery and
payment models, the nation’s post-COVID healthcare infrastructure is likely to deteriorate in many American
communities, making them more vulnerable to chronic disease, pandemics and the vicissitudes of life.

Article 2 in our “Future of Hospitals” series will explore the public policy challenges of providing appropriate, affordable and accessible healthcare to all American communities.

 

 

 

Not-for-profit hospitals are financially resilient due to strong management, S&P Global Ratings says.

https://www.healthcarefinancenews.com/news/not-profit-hospitals-and-health-systems-have-shown-financial-resilience-due-strong-management?mkt_tok=eyJpIjoiTmpJME5qVTNOVEU1TXpRdyIsInQiOiJDdUIxQ1NKdng1b0FkQ1wvQlwvNFBTc1JIbmVwYUZOeUhCZ3VlNlZzdmhNbkhBQlhnXC9JeTI4c2NDeE80REk0YWJ1Nk1jSzl4QjFDbjFMTkxKdmVCblY1RUlSYTIwUmlhSEJ6VXpkOUZZdytUWDhaV1poaEljcVh5ZFdEOUdVZlQzZyJ9

The broad balance sheet shows hospitals are improving financial strength and flexibility compared to two decades ago.

Not-for-profit hospitals and health systems are financially keeping up with changes in the healthcare landscape, according to a new S&P Global Ratings report.

S&P Global Ratings said it believes the not-for-profit healthcare sector has been incredibly resilient over the past two decades, in large part due to strong management and governance.

The broad balance sheet shows improved financial strength and flexibility compared to two decades ago, as is also the case for maximum annual debt service coverage.

Hospitals have done this throughout a time when changes in government policy, reimbursement and the move to value-based care have been factors in their operating performance and financial position. The report shows more variability in operating revenue and excess margins. 

S&P Global looked at providers rated from BBB+ to AA. The stronger providers have seen margin improvement, while weaker rated providers have been generally stable with some pockets of weakness at the lowest reported rating levels, the report said.

WHY THIS MATTERS

Health system challenges include increasing levels of competition and disruption; consumerism and the heightened focus on quality measures and outcomes; the rapid growth in technology and big data analytics; the rise of population health and changes in payment delivery models; and a fundamental shift in how and where patients are treated.

“To be successful, provider management teams must adapt and adjust or run the risk of being left behind,” the credit analysts said.

A factor benefiting health systems has been the low interest rate environment. This has allowed hospitals to finance strategic capital assets, while keeping carrying costs at very manageable levels.

Industry consolidation has had a favorable impact on enterprise profiles, the report said.  While ample “horizontal” competition exists for both hospitals and health systems, in many markets consolidation has made it more manageable.

But competition between hospitals and health systems and new market entrants seeking to control niche services or some aspect of ambulatory care services is presenting new and rapidly evolving threats to enterprise profiles, the report said.

OUTCOMES

Net patient service revenue has risen across all S&P rated categories for both stand-alone and system providers. This is due to a variety of reasons, including the addition of more business lines such as physician and insurance services, and increased industry consolidation;

Operating and excess margins are more complicated, highlighting the ebb and flow of industry trends, including increased joint venture and affiliation activity and investment market volatility.

Maximum annual debt service coverage has grown in all but the weakest rated levels, highlighting an improving balance between operational performance and debt.

Growth in days’ cash on hand has been a universal success even as capital expenditures remain robust.

Debt levels have been favorable with an improved cushion ratio and declining debt as a percentage of capitalization, both well-established trends.

TREND

Momentum continues to build for major legislative and regulatory changes at both the national and state level.

Many of the hospitals and health systems in S&P Global’s rated portfolio have navigated through numerous changes. Historically, a review of ratios over time demonstrates that providers have responded well to change as a group, although results have varied among individual organizations.

While credit quality can and will change over time,  the majority of the rated portfolio is well-positioned to compete effectively as new strategies are required, the analysts said.

S&P Global Ratings analyzes and publishes not-for-profit healthcare median ratios annually, and has been doing so for over 20 years.

ON THE RECORD

“In our view, senior leadership and management teams have provided guidance and direction through a series of difficult and changing periods and have emerged as generally stronger organizations from a financial profile standpoint,” the credit analysts said. “We believe the vast majority of rated hospitals and health systems have the financial discipline and expertise to navigate the challenges over the next decade and beyond, and while there may be some movement in underlying trends in these key metrics, the overall financial outlook, barring any significant shocks from policy or macroeconomic shifts, should remain generally consistent.”