In a blog post Wednesday, American Hospital Association (AHA) General Counsel Melinda Hatton rebuked Politico’s characterization of a recent Moody’s report on nonprofit hospital financials in 2018.
Hatton charged that Politico “cherry-picked” metrics from the report, homed in on a “single measure of financial viability,” and “ignored much of the medians data that tell a more complete story.”
Writing that the story “does not accurately capture financial pressures facing hospitals,” Hatton continued that the Moody’s report only represents a mid-year glimpse at nonprofit hospital finances.
The public back and forth began with the May 13 edition of Politico’s Pulse newsletter, which described the state of U.S. hospitals as “OK,” citing data from Moody’s that indicated nonprofit hospital revenues grew faster than costs for the first time since 2015.
While mentioning that the average operating margin of nonprofit hospitals was 1.7% last year, Politico also noted that average operating cash flow margins finished at 8%.
Politico stated that industry observers regard operating cash flow margin as a better reflection of “how much money a hospital is actually collecting” than the operating margin.
Politico’s description tied into the push for greater accountability from hospitals regarding high prices, specifically referencing a recent RAND Corp. study that found private insurers paid more than twice what Medicare paid to hospitals in 2017.
Hospital groups like the AHA and the Federal of American Hospitals pushed back on the RAND study from last week, taking issue with its sample size and reliance on Medicare payment rates as the benchmark for hospital prices.
Writing about the Moody’s report, Hatton wrote that while hospitals did experience a “modest uptick” in revenue growth last year, such growth trailed historical levels as hospitals faced challenging patient volumes, low reimbursement rates, and shifting payer mixes.
She also noted that the Moody’s report found that inpatient services remained flat in 2018, widespread provider consolidation has offered “stability in light of downward financial pressures,” and that hospitals are continuing to put “efficiency improvements” into place.
“Many of the expenses hospitals’ are experiencing now, and will likely experience in the future, are beyond their control,” Hatton wrote. “Wages and benefits are the single largest cost for hospitals, and are likely to increase in the future as the nation experiences a robust labor market, and a nursing shortage persists in many communities. The high cost of specialty drugs is also a driver of the cost of care.”
“These complexities make for a nuanced story, but any story worth telling is worth telling well,” Hatton wrote.
The deluge of M&A activity among nonprofit health systems is expected to continue on in 2019, with the potential for some “unconventional relationships,” according to a Moody’s report released Friday morning.
Driven by tight financial conditions challenging the nonprofit hospital business model, as well as the entrance of nontraditional corporate players to healthcare and the potential changes to the ACA, more M&A activity is expected throughout the year.
Moody’s expects nonprofit health systems to engage in partnerships with other hospitals but also seek to align with companies specializing in data analytics or ridesharing services to continue the transition from inpatient care to outpatient care.
Nonprofit health systems are also aiming to increase their footing when negotiating with payers, which involves strategic decisions to diversity service options and increase their geographic reach.
The report cites ProMedica’s acquisition of HCR Manorcare and Tower Health’s purchase of five for-profit acute care hospitals as examples of nonprofit systems taking a short-term credit hit to gain stable long-term positioning for the organization.
Though M&A activity is expected to be widespread and a primary objective for many nonprofit systems, the Moody’s report warned that additional scrutiny from state and federal regulators is on the way.
The requirements put in place on the CHI-Dignity Health merger by California Attorney General Xavier Becerra, along with price increase restrictions imposed by Massachusetts Attorney General Maura Healey on CareGroup and Lahey Health, are cited as examples of the terms health systems should expect to meet.
The Moody’s report also indicates that for-profit hospitals will delve further into capital markets so long as they remain receptive and buoyed by low interest rates. This approach could lead to lower interest costs and improve liquidity, which would bolster their credit standing.
Jessica Gladstone, Moody’s associate managing director and lead analyst on for-profit hospitals, told HealthLeaders that rising interest rates would a material impact on many for-profit hospitals.
“High cash interest costs relative to earnings are already consuming the majority of cash for many FP hospital companies,” Gladstone said. “For companies with floating rate debt, rising interest rates (depending on the amount of the increase) could leave some FP hospitals with very little free cash flow left to pay down debt or otherwise invest to grow operations.”
Gladstone added that while many of the same headwinds facing for-profit hospitals remain a challenge in 2019, executives can be encouraged by the opportunities ahead to refinance high-cost debt and achieve cost savings.
Several deals are listed as potential opportunities that could benefit for-profit healthcare organizations in 2019 regarding changes to capital structure, interest cost savings, as well as M&A activity:
Starting last March, retail giant Walmart now requires that its employees use a select network of 800 diagnostic imaging providers, or face additional out-of-pocket costs, according to an article this week from Kaiser Health News. Lisa Woods, Walmart’s senior director of benefits design, said high error rates in imaging studies were the driver for establishing the program, with the perspective that “a quality MRI or CT scan can improve the accuracy of diagnoses early in the care journey.”
The network was created in partnership with New York-based Covera Health, a technology company that has amassed information on thousands of imaging facilities nationwide, and uses independent radiologists to evaluate a sample of studies to determine facility and radiologist error rates. According to the article, while many employers have steered employees to lower-cost imaging networks, Walmart is the first to do so based on quality of the studies.
Whether this network will be effective in achieving its stated goal—reducing misdiagnoses that lead to unnecessary care and surgery—remains an open question. Poor-quality imaging undoubtedly leads to repeat studies, which carry significant costs. But many other factors (clinical judgement, incentives, patient preferences) contribute to the decision to perform surgery. Defining imaging “quality” beyond the blunt measures of repeat rates, technical adequacy and radiologist sub-specialization is highly complex, and requires correlation with pathology and clinical outcomes data—a high bar for an outsourced analytics provider.
Despite Walmart’s goals, it will be difficult for imaging providers to differentiate their services solely on quality. The high variability in imaging prices is well-documented, and choice of provider is largely made by consumers, for whom imaging is a commodity service.
Without an activist employer or payer to steer them, consumers will likely continue to choose their imaging providers based on their doctor’s recommendation and out-of-pocket costs.