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.
Despite a strong economy and low uninsured population, nonprofit hospital rating downgrades sharply outpaced upgrades throughout 2017 — creating a downgrade-to-upgrade ratio of 3.4 to 1.0, which is more than double the 2016 ratio of 1.5 to 1.0, according to a new report by Moody’s Investors Service.
In 2017, there were 41 credit downgrades and 12 credit upgrades for nonprofit hospitals, compared to 32 credit downgrades and 21 credit upgrades in 2016.
Moody’s attributed the credit stress in 2017 to rising labor and supply costs coupled with a low revenue growth environment.
“An acute nursing shortage in many markets, along with rising supply and pharmaceutical costs, resulted in expense growth outpacing revenue growth for many hospitals and health systems,” the Moody’s report reads.
While hospitals of all sizes were downgraded, 60 percent of the downgrades in 2017 affected smaller health systems with less than $1 billion in total operating revenue. In addition, 12 of the downgrades occurred in Pennsylvania and Ohio, reflecting the lagging economy, aging demographics, competitive service area and commercial payer challenges in the Rust Belt area.
Although downgrades outpaced upgrades in 2017, Moody’s affirmed the vast majority of ratings in 2017, which is in line with historical trends.