Asexpected, 2023 saw a material increase in downgrades over 2022 while the number of upgrades declined from the prior year. Volume showed favorable growth for many hospitals during 2023 although some indicators remained below pre-pandemic levels. Other hospitals reported a payer mix shift toward more Medicare as the population continued to age and Medicare Advantage plans gained momentum at the expense of commercial revenues. Continued labor challenges drove expense growth, even with many organizations reporting a reduction in temporary labor, as permanent hires pressured salary and benefit expenses. Some of the downgrades reflected pronounced operating challenges that led to covenant violations while others were due to a material increase in leverage viewed to be too high for the rating category.
Figure1: Downgrades at Moody’s, S&P, and Fitch
Here are five key takeaways:
The ratio of downgrades to upgrades reached a high level for all three rating agencies: Moody’s, 3.2-to-1; S&P: 3.8-to-1; and Fitch: 3.5-to-1. In 2022, the ratio crested just above 2.0-to-1 at the highest among the three firms.
Downgrades covered a wide swath of hospitals, ranging from single-site general acute care facilities to academic medical centers as well as large regional and multistate systems. Many of the hospital downgrades were concentrated in New York, Pennsylvania, Ohio, and Washington. All rating categories saw downgrades, although the majority were clustered in the Baa/BBB and lower categories.
Multi-notch downgrades were mainly relegated to ratings that were already deep into speculative grade. Multi-notch upgrades were due to mergers or acquisitions where the debt was guaranteed by or added to the legal borrowing group of the higher rated system.
Upgrades reflected fundamental improvement in financial performance and debt service coverage along with strengthening balance sheet indicators. Like the downgraded organizations, upgraded hospitals and health systems ranged from single-site hospitals to expansive, super-regional systems. Some of the upgrades reflected mergers into higher-rated systems.
The wide span between downgrades to upgrades in 2023 would suggest that the credit gap between highly rated hospitals (say, the “A” or “Aa/AA” category) compared to “Baa/BBB” and speculative grade is widening. That said, given that rating affirmations remain the predominant rating activity annually, the rating agencies reported only a subtle shift in the overall distribution of ratings since the beginning of the pandemic in their panel discussion at Kaufman Hall’s October 2023 Healthcare Leadership Conference.
One person’s prediction for 2024?
It’s a safe bet that downgrades will outpace upgrades given the persistent challenges, although the ratio may narrow if the improvement in current performanceholds. That said, the rating agencies are maintaining mixed views for 2024. S&P and Fitch are sticking with negative and deteriorating outlooks, respectively, while Moody’s has revised its outlook to stable, anticipating that the rough times of 2022 are behind us.
All three rating agencies predict that we are not out of the woods yet when it comes to covenant challenges, especially in the lower rating categories or for those organizations that report a second year of covenant violations.
President Joe Biden last night highlighted several healthcare priorities during his State of the Union address, including efforts to reduce drug costs, a universal cap on insulin prices, healthcare coverage, and more.
COVID-19
In his speech, Biden acknowledged the progress the country has made with COVID-19 over the last few years.
“Two years ago, COVID had shut down our businesses, closed our schools, and robbed us of so much,” he said. “Today, COVID no longer controls our lives.”
Although Biden noted that the COVID-19 public health emergency (PHE) will come to an end soon, he said the country should remain vigilant and called for more funds from Congress to “monitor dozens of variants and support new vaccines and treatments.”
The Inflation Reduction Act
Biden highlighted several provisions of the Inflation Reduction Act (IRA), which passed last year, that aim to reduce healthcare costs for millions of Americans.
“You know, we pay more for prescription drugs than any major country on earth,” he said. “Big Pharma has been unfairly charging people hundreds of dollars — and making record profits.”
Under the IRA, Medicare is now allowed to negotiate the prices of certain prescription drugs, and out-of-pocket drug costs for Medicare beneficiaries are capped at $2,000 per year. Insulin costs for Medicare beneficiaries are also capped at $35 a month.
“Bringing down prescription drug costs doesn’t just save seniors money,” Biden said. “It will cut the federal deficit, saving tax payers hundreds of billions of dollars on the prescription drugs the government buys for Medicare.”
Caps on insulin costs for all Americans
Although the IRA limits costs for seniors on Medicare, Biden called for the policy to be made universal for all Americans. According to a 2022 study, over 1.3 million Americans skip, delay purchasing, or ration their insulin supply due to costs.
“[T]here are millions of other Americans who are not on Medicare, including 200,000 young people with Type I diabetes who need insulin to save their lives,” Biden said. “… Let’s cap the cost of insulin at $35 a month for every American who needs it.”
With the end of the COVID-19 PHE, HHS estimates that around 15 million people will lose health benefits as states begin the process to redetermine eligibility.
The opioid crisis
Biden also addressed the ongoing opioid crisis in the United States and noted the impact of fentanyl, in particular.
“Fentanyl is killing more than 70,000 Americans a year,” he said. “Let’s launch a major surge to stop fentanyl production, sale, and trafficking, with more drug detection machines to inspect cargo and stop pills and powder at the border.”
He also highlighted efforts by to expand access to effective opioid treatments. According to a White House fact sheet, some initiatives include expanding access to naloxone and other harm reduction interventions at public health departments, removing barriers to prescribing treatments for opioid addiction, and allowing buprenorphine and methadone to be prescribed through telehealth.
Access to abortion
In his speech, Biden called on Congress to “restore” abortion rights after the U.S. Supreme Court overturned Roe v. Wade last year.
“The Vice President and I are doing everything we can to protect access to reproductive healthcare and safeguard patient privacy. But already, more than a dozen states are enforcing extreme abortion bans,” Biden said.
He also added that he will veto a national abortion ban if it happens to pass through Congress.
Progress on cancer
Biden also highlighted the Cancer Moonshot, an initiative launched last year aimed at advancing cancer treatment and prevention.
“Our goal is to cut the cancer death rate by at least 50% over the next 25 years,” Biden said. “Turn more cancers from death sentences into treatable diseases. And provide more support for patients and families.”
According to a White House fact sheet, the Cancer Moonshot has created almost 30 new federal programs, policies, and resources to help increase screening rates, reduce preventable cancers, support patients and caregivers and more.
“For the lives we can save and for the lives we have lost, let this be a truly American moment that rallies the country and the world together and proves that we can do big things,” Biden said. “… Let’s end cancer as we know it and cure some cancers once and for all.”
Healthcare coverage
Biden commended the fact that “more American have health insurance now than ever in history,” noting that 16 million people signed up for plans in the Affordable Care Act marketplace this past enrollment period.
In addition, Biden noted that a law he signed last year helped millions of Americans save $800 a year on their health insurance premiums. Currently, this benefit will only run through 2025, but Biden said that we should “make those savings permanent, and expand coverage to those left off Medicaid.”
Advisory Board’s take
Our questions about the Medicaid cliff
President Biden extolled economic optimism in the State of the Union address, touting the lowest unemployment rate in five decades. With job creation on the rise following the incredible job losses at the beginning of the COVID-19 pandemic, there is still a question of whether the economy will continue to work for those who face losing Medicaid coverage at some point in the next year.
The public health emergency (PHE) is scheduled to end on May 11. During the PHE, millions of Americans were forced into Medicaid enrollment because of job losses. Federal legislation prevented those new enrollees from losing medical insurance. As a result, the percentage of uninsured Americans remained around 8%. The safety net worked.
Starting April 1, state Medicaid plans will begin to end coverage for those who are no longer eligible. We call that the Medicaid Cliff, although operationally, it will look more like a landslide. Currently, state Medicaid regulators and health plans are still trying to figure out exactly how to manage the administrative burden of processing millions of financial eligibility records. The likely outcome is that Medicaid rolls will decrease exponentially over the course of six months to a year as eligibility is redetermined on a rolling basis.
In the marketplace, there is a false presumption that all 15 million Medicaid members will seamlessly transition to commercial or exchange health plans. However, families with a single head of household, women with children under the age of six, and families in both very rural and impoverished urban areas will be less likely to have access to commercial insurance or be able to afford federal exchange plans. Low unemployment and higher wages could put these families in the position of making too much to qualify for Medicaid, but still not making enough to afford the health plans offered by their employers (if their employer offers health insurance). Even with the expansion of Medicaid and exchange subsidies, it, is possible that the rate of uninsured families could rise.
For providers, this means the payer mix in their market will likely not return to the pre-pandemic levels. For managed care organizations with state Medicaid contracts, a loss of members means a loss of revenue. A loss of Medicaid revenue could have a negative impact on programs built to address health equity and social determinants of health (SDOH), which will ultimately impact public health indicators.
For those of us who have worked in the public health and Medicaid space, the pandemic exposed the cracks in the healthcare ecosystem to a broader audience. Discussions regarding how to address SDOH, health equity, and behavioral health gaps are now critical, commonplace components of strategic business planning for all stakeholders across our industry’s infrastructure.
But what happens when Medicaid enrollment drops, and revenues decrease? Will these discussions creep back to the “nice to have” back burners of strategic plans?
The majority of hospitals are predicted to have negative margins in 2022, marking the worst year financially for hospitals since the beginning of the Covid-19 pandemic.
In Part 1 of Radio Advisory’s Hospital of the Future series, host Rachel (Rae) Woods invites Advisory Board experts Monica Westhead, Colin Gelbaugh, and Aaron Mauck to discuss why factors like workforce shortages, post-acute financial instability, and growing competition are contributing to this troubling financial landscape and how hospitals are tackling these problems.
As we emerge from the global pandemic, health care is restructuring. What decisions should you be making, and what do you need to know to make them? Explore the state of the health care industry and its outlook for next year by visiting advisory.com/HealthCare2023.
Revenue cycle challenges “seem to have intensified over the past year,” according to Kaufman Hall’s “2022 State of Healthcare Performance Improvement” report, released Oct. 18.
The consulting firm said that in 2021, 25 percent of survey respondents said they had not seen any pandemic-related effects on their respective revenue cycles. This year, only 7 percent said they saw no effects.
The findings in Kaufman Hall’s report are based on survey responses from 86 hospital and health system leaders across the U.S.
Here are the top five ways leaders said the pandemic affected the revenue cycle in 2022:
1. Increased rate claim denials — 67 percent
2. Change in payer mix: Lower percentage of commercially insured patients — 51 percent
3. Increase in bad debt/uncompensated care — 41 percent
4. Change in payer mix: Higher percentage of Medicaid patients — 35 percent
5. Change in payer mix: Higher percentage of self-pay or uninsured patients — 31 percent
A spokesperson for RWJBarnabas Health said the case is “yet another in a series of baseless complaints filed by … an organization whose leadership apparently prefers to assign blame to others rather than accept responsibility for the unsatisfactory results of their own poor business decisions and actions over the years.”
A lawsuit filed last week accuses RWJBarnabas Health of “a years-long systemic effort” to hamper competition and monopolize acute care hospital services in northern New Jersey.
The case brought by CarePoint Health to a U.S. District Court accuses the state’s largest integrated healthcare delivery system of “aiming to destroy the three hospitals operated by CarePoint as independent competitors” with the support of healthcare real estate investors and Horizon Blue Cross Blue Shield, the state’s largest health insurer.
CarePoint Health includes the 349-bed Christ Hospital, 224-bed Bayonne Medical and 348-bed Hoboken University Medical Center (HUMC).
The group said RWJBarnabas intended to force the first two hospitals to shut down but acquire the third due to its more profitable payer mix.
“RWJBarnabas Health’s] goal explicitly disregarded the needs of the poor, underinsured and charity care patients which CarePoint serves in its role as the safety net hospital system in Jersey City and surrounding areas,” CarePoint wrote in the lawsuit.
The slew of alleged tactics listed in the lawsuit largely surround RWJBarnabas Health’s “serial acquisitions” of hospitals, providers and real estate that “has gone unchecked by the state and [New Jersey Department of Health],” CarePoint wrote.
This included an alleged bad faith proposal to acquire Christ Hospital and HUMC, the true intent of which CarePoint said was to “gain market knowledge and gather competitive intelligence, and use this newly-acquired information to freeze programmatic growth and any significant hiring or construction at Christ Hospital.” The process had a negative impact on CarePoint’s employee retention and staffing, according to the suit.
The plaintiff also alleged that RWJBarnabas used its political connections to influence whether state departments granted CarePoint Certificates of Need for multiple revenue-generating projects as well as COVID-19 relief funding.
Further, CarePoint accused RWJBarnabas of strategically adjusting its service offerings in competitive markets to drive uninsured or underinsured patients to CarePoint facilities while using its relationships with Horizon and ambulance operators to drive emergency room traffic and well-insured patients, respectively, to competing locations.
These collective actions constitute violations of the Sherman Antitrust Act as well as the New Jersey Antitrust Act, CarePoint wrote.
“The idea that [RWJBarnabas Health] would use its influence to jeopardize the health of that community and the care providers of a competing hospital not only directly contradicts its own vision, but clearly demonstrates that [RWJBarnabas Health] is far more interested in anti-competitive and predatory business activities than serving the New Jersey community,” CarePoint wrote.
RWJBarnabas Health discounted the allegations in an email statement.
“This is yet another in a series of baseless complaints filed by CarePoint, an organization whose leadership apparently prefers to assign blame to others rather than accept responsibility for the unsatisfactory results of their own poor business decisions and actions over the years,” a spokesperson for the system told Fierce Healthcare. “RWJBarnabas Health has a longstanding commitment to serve the residents of Hudson County, and is proud of the significant investments we have made in technology, facilities and clinical teams as we advance our mission.”
RWJBarnabas Health treats over 3 million patients per year and employs 37,000 people. The academic healthcare system runs 12 acute care hospitals and four specialty hospitals alongside other locations and services. It disclosed more than $6.6 billion in total operating revenues across 2021.
The system’s merger and acquisition activity placed it in the federal spotlight this past year after the Federal Trade Commission moved to block its planned integration of New Brunswick-based Saint Peter’s Healthcare System. The deal was called off in June.
Becker’s calculated the payer mix within the nation’s top ranked hospitals to determine the share of their patients covered under commercial plans, Medicare, Medicaid, Medicare Advantage, uninsured/bad debt and charity care.
The 2019 data released April 5 is from the coverage, cost and value team at the National Academy for State Health Policy in collaboration with Houston-based Rice University’s Baker Institute for Public Policy.
Payer mix in the nation’s top 19 hospitals:
(1) Mayo Clinic Hospital — Rochester, Minn.
Commercial: 50 percent
Medicare: 33 percent
Medicare Advantage: 9 percent
Medicaid: 7 percent
Charity care: 1 percent
Uninsured / Bad debt: 0 percent
(2) Cleveland Clinic Hospital
Commercial: 45 percent
Medicare: 24 percent
Medicare Advantage: 17 percent
Medicaid: 12 percent
Charity care: 1 percent
Uninsured / Bad debt: 1 percent
(3) Ronald Reagan UC Los Angeles Medical Center
Commercial: 45 percent
Medicare: 27 percent
Medicaid: 18 percent
Medicare Advantage: 8 percent
Charity care: 0 percent
Uninsured / Bad debt: 0 percent
(4) Johns Hopkins Hospital — Baltimore
Commercial: 46 percent
Medicare: 28 percent
Medicaid: 22
Medicare Advantage: 2 percent
Uninsured / Bad debt: 2 percent
Charity Care: 1 percent
(5) Massachusetts General Hospital — Boston
Commercial: 48 percent
Medicare: 32 percent
Medicaid: 11 percent
Medicare Advantage: 7 percent
Charity care: 1 percent
Uninsured / Bad debt: 1 percent
(6) Cedars-Sinai Medical Center — Los Angeles
Commercial: 42 percent
Medicare: 41 percent
Medicaid: 10 percent
Medicare Advantage: 6 percent
Charity care: 1 percent
Uninsured / Bad debt: 0 percent
(7) NewYork-Presbyterian Hospital — New York City
Commercial: 34 percent
Medicaid: 25 percent
Medicare: 22 percent
Medicare Advantage: 17 percent
Charity Care: 1 percent
Uninsured / Bad debt: 1 percent
(8) NYU Langone Hospital — New York City
Commercial: 42 percent
Medicare: 25 percent
Medicaid: 19 percent
Medicare Advantage: 6 percent
Charity care: 1 percent
Uninsured / Bad debt: 0 percent
(9) UC San Francisco Medical Center
Commercial: 42 percent
Medicaid: 25 percent
Medicare: 25 percent
Medicare Advantage: 5 percent
Charity Care: 1 percent
Uninsured / Bad debt: 0 percent
(10) Northwestern Memorial Hospital — Chicago
Commercial: 52 percent
Medicare: 27 percent
Medicaid: 11 percent
Medicare Advantage: 7 percent
Charity care: 2 percent
Uninsured / Bad debt: 1 percent
(11) Michigan Medicine — Ann Arbor
Commercial: 53 percent
Medicare: 20 percent
Medicaid: 14 percent
Medicare Advantage: 11 percent
Charity care: 1 percent
Uninsured / Bad debt: 1 percent
(12) Stanford Hospital — Palo Alto, Calif.
Commercial: 46 percent
Medicare: 34 percent
Medicaid: 13 percent
Medicare Advantage: 7 percent
Charity care: 0
Uninsured / Bad debt: 0
(13) Penn Presbyterian Medical Center — Philadelphia
Commercial: 46 percent
Medicare: 29 percent
Medicaid: 13 percent
Medicare Advantage: 12 percent
Uninsured / Bad debt: 1 percent
Charity Care: 0
(14) Brigham and Women’s Hospital — Boston
Commercial: 53 percent
Medicare: 30 percent
Medicaid: 10 percent
Medicare Advantage: 6 percent
Charity Care: 1 percent
Uninsured / Bad debt: 1 percent
(15) Mayo Clinic Hospital — Phoenix
Commercial: 51 percent
Medicare: 42 percent
Medicare Advantage: 4 percent
Medicaid: 3 percent
Charity Care: 1 percent
Uninsured / Bad debt: 0 percent
(16) Houston Methodist Hospital
Commercial: 43 percent
Medicare: 33 percent
Medicare Advantage: 18 percent
Charity care:3 percent
Medicaid: 2 percent
Uninsured / Bad debt: 1 percent
(17 — tie) Barnes-Jewish Hospital — St. Louis
Commercial: 43 percent
Medicare: 29 percent
Medicare Advantage: 13 percent
Medicaid: 10 percent
Charity care: 4 percent
Uninsured / Bad debt: 1 percent
(17 — tie) Mount Sinai Hospital — New York City
Commercial: 33 percent
Medicaid: 28 percent
Medicare: 22 percent
Medicare Advantage: 15 percent
Charity care: 1 percent
Uninsured / Bad debt: 0 percent
(18) Rush University Medical Center — Chicago
Commercial: 41 percent
Medicare: 31 percent
Medicaid: 20 percent
Medicare Advantage: 6 percent
Charity care: 2 percent
Uninsured / Bad debt: 1 percent
(19) Vanderbilt University Medical Center — Nashville, Tenn.
The last time margins sank so deeply into the red was after the Balanced Budget Act of 1997, though today’s margins are faring worse.
COVID-19 continues to have deep and lingering financial impacts on hospitals in New Jersey. A midyear analysis of financial data shows nearly 60% of the state’s hospitals in the red and an average statewide operating margin of negative 4%.
The effects have been profound, and serve as a potential microcosm of the continuing impact of the coronavirus on hospital operating margins nationwide.
The decline in the state is the result of a dual blow of declining revenues and rising expenses, according to the report from the Center for Health Analytics, Research and Transformation at the New Jersey Hospital Association. Officials said the state’s hospitals haven’t experienced this level of fiscal distress in more than 20 years.
In fact, the last time margins sunk so deeply into the red was in the late 1990s. At that time, the Balanced Budget Act of 1997 resulted in significant payment cuts to the state’s hospitals, with margins falling to -1.7% and -2.3% in 1998 and 1999, respectively. And those numbers are not as distressing as the ones being experienced during the public health crisis.
CHART’s data, comparing June 30, 2019, with June 30, 2020, shows that total patient revenues declined 6.6%. Emergency department cases plummeted 23%, while hospital admissions fell by 8% and outpatient visits dropped by 22%.
An additional aggravating factor is a 12% increase in total operating expenses, because COVID-19 required hospitals to redirect resources to increase staffing; boost supplies of personal protective equipment, pharmaceuticals and ventilators; and modify operations and facilities to expand capacity.
CHART’s analysis takes a closer look at the disruption of elective procedures in New Jersey hospitals and its lingering impact. Governor Phil Murphy’s Executive Order 109, in effect March 27 through May 26, required hospitals to suspend elective procedures during the state’s COVID-19 surge. CHART used claims data for some of the highest-volume elective procedures performed in New Jersey hospitals – bariatric surgery, pacemaker insertion, spinal fusion, knee replacement and hernia repair – to gauge the impact.
In April and May 2019, the state’s hospitals performed these procedures 4,336 times. That number plummeted to just 400 statewide in April and May 2020. The state’s executive order suspending procedures during this time allowed exemptions for cases in which a delay would result in “undue risk to the current or future health of the patient.”
The year-over-year decline persisted even when the suspension was lifted. In June and July of 2019, 4,194 procedures from the list of high-volume procedures were performed, compared with 3,191 in June and July of 2020.
But the greatest decline in volume by percentage was seen in hospital emergency departments, where cases nosedived 23.4% between June 30, 2019, and June 30, 2020. That has healthcare leaders concerned.
NJHA officials said a hospital turnaround is critical for the statewide recovery from the coronavirus.
“The state’s hospitals pump $25 billion annually into the New Jersey economy and employ 154,000 people,” said NJHA’s Roger Sarao, vice president of economic and financial information and lead author of the CHART report. “They are an essential part of the road to recovery from this public health and economic crisis.”
THE LARGER TREND
The effects of the pandemic on the nation’s hospitals will be long-lasting, especially among nonprofits. A recent Fitch Ratings analysis showed that the full effects have yet to be felt.
The agency predicted that capital spending will be greatly reduced in the initial years post-pandemic, though some of it will ultimately accelerate due to anticipated merger and acquisition activity.
Fitch expects hospitals to take on added expenses to perform the same level of service, and predicts revenue declines from a shift in payer mix.
For-profit hospitals are expected to see a financial decline over the next 12 to 18 months as federal relief funds that shored up revenue losses due to COVID-19 start to wane, a recent analysis from Moody’s said.
The analysis, released Monday, finds that cost management is going to be challenging for hospital systems as more surgical procedures are expected to migrate away from the hospital and people lose higher-paying commercial plans and go to lower-paying government programs such as Medicaid.
“The number of surgical procedures done outside of the hospital setting will continue to increase, which will weaken hospital earnings, particularly for companies that lack sizeable outpatient service lines (including ambulatory surgery centers),” the analysis said.
A $175 billion provider relief fund passed by Congress as part of the CARES Act helped keep hospital systems afloat in March and April as volumes plummeted due to the cancellation of elective procedures and reticence among patients to go to the hospitals.
Some for-profit systems such as HCA and Tenet pointed to relief funding to help generate profits in the second quarter of the year. The benefits are likely to dwindle as Congress has stalled over talks on replenishing the fund.
“Hospitals will continue to recognize grant aid as earnings in Q3 2020, but this tailwind will significantly moderate after that,” Moody’s said.
Cost cutting challenges
Compounding problems for hospitals is how to handle major costs.
Some hospital systems cut some costs such as staff thanks to furloughs and other measures.
“Some hospitals have said that for every lost dollar of revenue, they were able to cut about 50 cents in costs,” the analysis said. “However, we believe that these levels of cost cuts are not sustainable.”
Hospitals can’t cut costs indefinitely, but the costs for handling the pandemic (more money for personal protective equipment and safety measures) are going to continue for some time, Moody’s added.
“As a result, hospitals will operate less efficiently in the wake of the pandemic, although their early experiences in treating COVID-19 patients will enable them to provide care more efficiently than in the early days of the pandemic,” the analysis found. “This will help hospitals free up bed capacity more rapidly and avoid the need for widespread shutdowns of elective surgeries.”
But will that capacity be put to use?
The number of surgical procedures done outside of the hospital is likely to increase and will further weaken earnings, Moody’s said.
“Outpatient procedures typically result in lower costs for both consumers and payers and will likely be preferred by more patients who are reluctant to check-in to a hospital due to COVID-19,” the analysis said.
The payer mix will also shift, and not in hospitals’ favor.Mounting job losses due to the pandemic will force more patients with commercial plans toward programs such as Medicaid.
“This will hinder hospitals’ earnings growth over the next 12-18 months,” Moody’s said. “Employer-provided health insurance pays significantly higher reimbursement rates than government-based programs.”
Bright spots
There are some bright spots for hospitals, including that not all of the $175 billion has been dispersed yet. The CARES Act continues to provide hospitals with a 20% add-on payment for treating Medicare patients that have COVID-19, and it suspends a 2% payment cut for Medicare payments that was installed as part of sequestration.
The Centers for Medicare & Medicaid Services also proposed increasing outpatient payment rates for the 2021 fiscal year by 2.6% and in-patient rates by 2.9%. The fiscal year is set to start next month.
Patient volumes could also return to normal in 2021. Moody’s expects that patient volumes will return to about 90% of pre-pandemic levels on average in the fourth quarter of the year.
“The remaining 10% is likely to come back more slowly in 2021, but faster if a vaccine becomes widely available,” the analysis found.
“It’s new territory, which is why we’re taking that measured approach on rating actions,” Suzie Desai, senior director at S&P, said.
The healthcare sector has been bruised from the novel coronavirus and the effects are likely to linger for years, but the first half of 2020 has not resulted in an avalanche of hospital and health system downgrades.
At the outset of the pandemic, some hospitals warned of dire financial pressures as they burned through cash while revenue plunged. In response, the federal government unleashed $175 billion in bailout funds to help prop up the sector as providers battled the effects of the virus.
Still, across all of public finance — which includes hospitals — the second quarter saw downgrades outpacing upgrades for the first time since the second quarter of 2017.
S&P characterized the second quarter as a “historic low” for upgrades across its entire portfolio of public finance credits.
“While only partially driven by the coronavirus, the second quarter was the firstsince Q2 2017 with the number of downgrades surpassing upgrades and by the largest margin since Q3 2014,” according to a recent Moody’s Investors Service report.
Through the first six months of this year, Moody’s has recorded 164 downgrades throughout public finance and, more specifically, 27 downgrades among the nonprofit healthcare entities it rates.
By comparison, Fitch Ratings has recorded 14 nonprofit hospital and health system downgrades through July and just two upgrades, both of which occurred before COVID-19 hit.
“Is this a massive amount of rating changes? By no means,” Kevin Holloran, senior director of U.S. Public Finance for Fitch, said of the first half of 2020 for healthcare.
Also through July, S&P Global recorded 22 downgrades among nonprofit acute care hospitals and health systems, significantly outpacing the six healthcare upgrades recorded over the same period.
“It’s new territory, which is why we’re taking that measured approach on rating actions,” Suzie Desai, senior director at S&P, said.
Still, other parts of the economy lead healthcare in terms of downgrades. State and local governments and the housing sector are outpacing the healthcare sector in terms of downgrades, according to S&P.
Virus has not ‘wiped out the healthcare sector’
Earlier this year when the pandemic hit the U.S., some made dire predictions about the novel coronavirus and its potential effect on the healthcare sector.
Reports from the ratings agencies warned of the potential for rising covenant violations and an outlook for the second quarter that would result in the “worst on record,“ one Fitch analyst said during a webinar in May.
That was likely “too broad of a brushstroke,” Holloran said. “It has not come in and wiped out the healthcare sector,” he said. He attributes that in part to the billions in financial aid that the federal government earmarked for providers.
Though, what it has revealed is the gaps between the strongest and weakest systems, and that the disparities are only likely to widen, S&P analysts said during a recent webinar.
The nonprofit hospitals and health systems pegged with a downgrade have tended to be smaller in size in terms of scale, lower-rated already and light on cash, Holloran said.
Still, some of the larger health systems were downgraded in the first half of the year by either one of the three rating agencies, including Sutter Health, Bon Secours Mercy Health, Geisinger, University of Pittsburgh Medical Center and Care New England.
“This is something that individual management of a hospital couldn’t control,” said Rick Gundling, senior vice president of Healthcare Financial Management Association, which has members from small and large organizations. “It wasn’t a bad strategy — that goes into a downgrade. This happened to everybody.”
Deteriorating payer mix
Looking forward, some analysts say they’re more concerned about the long-term effects for hospitals and health systems that were brought on by the downturn in the economy and the virus.
One major concern is the potential shift in payer mix for providers.
As millions of people lose their job they risk losing their employer-sponsored health insurance. They may transition to another private insurer, Medicaid or go uninsured.
For providers, commercial coverage typically reimburses at higher rates than government-sponsored coverage such as Medicare and Medicaid. Treating a greater share of privately insured patients is highly prized.
If providers experience a decline in the share of their privately insured patients and see a growth in patients covered with government-sponsored plans, it’s likely to put a squeeze on margins.
The shift also poses a serious strain for states, and ultimately providers. States are facing a potential influx of Medicaid members at the same time state budgets are under tremendous financial pressure. It raises concerns about whether states will cut rates to their Medicaid programs, which ultimately affects providers.
Some states have already started to re-examine and slash rates, including Ohio.
One in every five workers is now collecting unemployment benefits as the country struggles to get the COVID-19 outbreak under control. A recent Families USA study estimates a quarter of the 21.9M workers that were furloughed or laid off between February and May lost their health insurance. And the payer mix will continue to change as the pandemic wears on.
The graphic below highlights a study from consultancy Oliver Wyman, looking at the impact of rising unemployment (at 15, 20 and 30 percent) on insurance coverage. With each five to ten percent rise in unemployment, the commercially insured population decreases by three to five percent. Those who lose employer-sponsored insurance either remain uninsured, buy coverage on the Obamacare marketplaces, or qualify for Medicaid.
Surprisingly, Washington State and California are reporting little to no enrollment growth in Medicaid programs thus far. Experts point to lack of outreach and consumer awareness as key contributors to the slow growth—but Medicaid enrollment will likely begin to rise quickly in coming months as temporary furloughs convert to more permanent layoffs.
The right side of the graphic spotlights the growing number of uninsured individuals in those states with the highest uninsured rates. The previous record for the largest increase in uninsured adults was between 2008 and 2009, when nearly 4M lost coverage.The current pandemic-driven increase has crushed that record by 39 percent.
On average, states are seeing uninsured populations increase by two percent, with some as high as five percent. And the two states with the highest uninsured rates, Florida and Texas, are also dealing with the largest surge in COVID-19 cases and deaths. The ranks of the uninsured will continue to climb as states reimpose shutdowns, government assistance ends, and layoffs grow.
HENRY KOTULA 