Outlook is negative for nonprofit hospital sector, Moody’s says


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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.


Moody’s: Preliminary nonprofit healthcare profitability margins at 10-year low


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The nonprofit hospital median operating cash flow margin decreased to 8.1 percent in fiscal year 2017, marking the lowest level seen since the 2008-09 recession, according to preliminary financial data from Moody’s Investors Service.

The revenue decline comes amid expense growth and pinched revenue growth.

Here are five report insights to know.

1. The nonprofit hospital median operating cash flow margin was 8.1 percent in fiscal year 2017 compared to 9.5 percent the year prior.

2. The nonprofit hospital annual median revenue growth rate decreased by 2.2 percent in fiscal year 2017 compared to the year prior, while the median expense growth rate fell by 1.7 percent. Pinched revenue growth was attributed to factors such as declining reimbursement from payers, as well as median growth in outpatient visits (2.2 percent) outpacing median growth in inpatient hospitalizations (1.2 percent). Moody’s expects nonprofit hospitals’ credits to continue to be stressed by the aging population and declining reimbursement.

3. Nonprofit hospital’s median absolute unrestricted cash and investments increased by 8.2 percent in fiscal year 2017, partially due to strong market returns, according to Moody’s. This compares to 3.8 percent in fiscal year 2016. But the agency reported this growth was offset by median days cash on hand, which only increased 1.5 percent as organizations were pressured by labor, technology and supply costs. Moving forward, Moody’s expects limited liquidity improvement as expenses grow and capital spending needs increase.

4. Due to weaker operating performance, nonprofit hospitals generally saw tempered leverage ratios. This is despite the fact median total absolute debt decreased 1.7 percent in fiscal year 2017, according to Moody’s. “Operating challenges and increased debt issuance in the fourth quarter of calendar year 2017 will keep debt service coverage measures subdued,” the agency wrote.

5. The fiscal year 2017 preliminary financial data from Moody’s is in line with the agency’s negative outlook on the nonprofit healthcare and hospital sector. The data was based on audited fiscal year 2017 financial statements for 160 nonprofit healthcare organizations, including freestanding hospitals as well as single- and multi-state health systems.

Access the full data here.

Trump Budget, Revised AHCA, Credit Negatives for NFP Hospitals


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The one-two punch of massive cuts to Medicaid that are proposed in both the new budget and the House Republicans’ revised American Healthcare Act would result in cuts of close to $1 trillion over 10 years, analysis shows.

Cutting Medicaid by more than $860 million over the next decade would be a credit negative for states and not-for-profit hospitals, both of which would be left scrambling for alternative funding to cover the loss, according to a new report from Moody’s Investors Service.

Last week the Trump administration unveiled a budget proposal that includes $610 billion in cuts to core Medicaid services, and an additional $250 million in reductions to Medicaid expansion programs created under the Affordable Care Act.

The following day, the Congressional Budget Office released its scoring of the revised American Health Care Act – the Republican plan to repeal and replace the Patient Protection and Affordable Care Act and estimated that it would reduce Medicaid spending by $834 million through 2026.

“The proposals significantly change the longstanding Medicaid financing system and are credit negative for states and not-for-profit hospitals,” Moody’s said in an issues brief.

For states that don’t have the luxury of ignoring budget imbalances, the changes would increase pressure to either kick people off Medicaid, increase the state share of Medicaid funding, or cut payments to hospitals and other providers, Moody’s says.

Hospitals, particularly those serving a high mix of Medicaid patients, could expect to see reimbursement cuts and more cases of uncompensated care as Medicaid patients lose the coverage they’d gained under the ACA’s expansion.

Medicaid is already a significant budget burden for states, consuming between 7% to 34% of state revenue and averaging 16%.

Under the ACA, bad debt expense at not-for-profit hospitals in states that expanded Medicaid eligibility declined on average by 15% to 20% since 2014, enhancing these hospitals’ cash flow. Similarly, the gains in insurance coverage lowered the nationwide uninsured rate to approximately 11%, with uninsured rates even lower in states that expanded their Medicaid rolls, Moody’s says.

“Although the budget would give states limited new flexibility to adjust their Medicaid programs, the measure overall reflects a significant cost shift away from federal funding to states,” Moody’s says. “This cost shift is significant and would force states to make difficult decisions about safety-net spending for hospitals that serve large numbers of indigent patients.”