Moody’s Investors Service has issued a negative outlook on the nonprofit healthcare and hospital sector for 2019. The outlook reflects Moody’s expectation that operating cash flow in the sector will be flat or decline and bad debt will rise next year.
Moody’s said operating cash flow will either remain flat or decline by up to 1 percent in 2019. Performance will largely depend on how well hospitals manage expense growth, according to the credit rating agency.
Moody’s expects cost-cutting measures and lower increases in drug prices to cause expense growth to slow next year. However, the credit rating agency said expenses will still outpace revenues due to several factors, including the ongoing need for temporary nurses and continued recruitment of employed physicians.
Hospital bad debt is expected to grow 8 to 9 percent next year as health plans place greater financial burden on patients. An aging population will increase hospital reliance on Medicare, which will also constrain revenue growth, Moody’s said.
The Republicans’ tax overhaul plan, which is expected to become law soon, will cause many healthcare organizations to reassess their debt levels.
The tax bill will limit the tax deduction companies take for the interest they pay on their debt to 30 percent of earnings before interest, taxes, depreciation and amortization. This change will put pressure on healthcare companies with heavy debt loads. In 2022, interest expense deductions would be further reduced, which could cause companies’ tax bills to increase further, according to The Wall Street Journal.
Franklin, Tenn.-based Community Health Systems and Dallas-based Tenet Healthcare, which carry about $14 billion and $15 billion of debt, respectively, could be negatively affected by the tax bill’s limit on interest expense deductions. On Tuesday, Tenet said it expects the change to lower its 2018 earnings forecast, according to the report.
In a report issued earlier this month, Moody’s Investors Service said many speculative-grade companies across several sectors, including healthcare, would be negatively affected if deductibility were limited.
Annual expense growth for nonprofit and public healthcare organizations outpaced annual revenue growth in fiscal year 2016, according to Moody’s Investors Service.
After years of cost containment, annual expense growth hit 7.2 percent in fiscal year 2016, which outpaced annual revenue growth of 6 percent. The expenses were fueled by several factors, including rising pension contributions and higher labor and pharmaceutical costs, according to Moody’s.
“Higher expenses coupled with positive, albeit slower, revenue growth, contributed to lower profitability, tempered liquidity growth, and moderation of nearly all financial metrics,” said Beth Wexler, a Moody’s vice president.
Ms. Wexler said total admissions at nonprofit and public hospitals grew in fiscal year 2016, but the growth rate slowed due to stabilization of the uninsured population.
The medians are based on an analysis of audited fiscal year 2016 financial statements for 323 freestanding hospitals, single-state health systems and multi-state healthcare systems, representing 81 percent of all Moody’s rated healthcare entities.