Nonprofit Hospital Consolidation to Continue in 2019

https://www.healthleadersmedia.com/finance/nonprofit-hospital-consolidation-continue-2019

Despite increased scrutiny from regulators, nonprofit health systems will remain active through mergers and acquisitions this year, according to a new Moody’s report.

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.

For-profits will tap into capital markets

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:

Additional highlights from the Moody’s report:

  • Expect smaller community and regional nonprofit hospitals to join cooperatives to gain leverage at the negotiating table on supply costs among other price points.
  • Growing investment by private equity firms in physician practices and ambulatory services, will put a pinch on nonprofit systems.
  • The entrance of Amazon, Walmart, and Apple can’t be discounted as another driver of M&A activity in 2019.
  • Vertical mergers like CVS-Aetna and the continued rise of telemedicine will drive patients away from traditional areas of care delivery, like hospitals.
  • Though major changes to the ACA remain unlikely due to the split government in Congress, smaller changes could still make a significant impact.
  • The report cites potential changes to site-neutral payments, Medicare quality-factor penalties, and DSH payment reductions as examples.

 

 

 

 

Illinois Supreme Court: Hospitals’ property tax exemption is constitutional

https://www.beckershospitalreview.com/legal-regulatory-issues/illinois-supreme-court-hospitals-property-tax-exemption-is-constitutional.html

Image result for illinois supreme court

 

The Illinois Supreme Court ruled Sept. 21 that non-profit hospitals in the state do not have to pay property taxes as long as the value of the charitable services they provide is equal to or greater than the taxes they would have paid, according to The Chicago Tribune.

The ruling was an affirmation of a lower court decision that previously upheld the constitutionality of the property tax exemption, which was challenged in the lawsuit against the Illinois Department of Revenue by Cook County taxpayer Constance Oswald.

“When you give these hospitals a pass on paying real estate taxes, people within the counties where the hospitals are located have to make it up,” Edward Joyce, Ms. Oswald’s lawyer, told The Tribune.

But advocates for nonprofit hospitals argued the law allows them to fully dedicate themselves to delivering care to underserved patients.

“For nonprofit hospitals, property tax exemption fosters [transformation] by permitting them to focus their time, energy, and financial resources on new strategies to better serve all of the residents of our state.” said A.J. Wilhelmi, president and CEO of the Illinois Health and Hospital Association. “Taxing nonprofit hospitals would hurt the communities they serve by diverting dollars that are better used to care for patients and to upgrade equipment, modernize facilities and hire needed staff.”

 

 

NOT-FOR-PROFIT OPERATING MARGINS CONTINUE TO DECLINE

https://www.healthleadersmedia.com/finance/not-profit-operating-margins-continue-decline?utm_source=silverpop&utm_medium=email&utm_campaign=ENL_180801_LDR_BREAKING_DeKalb_Emory%20(1)&spMailingID=14040768&spUserID=MTY3ODg4NTg1MzQ4S0&spJobID=1460932625&spReportId=MTQ2MDkzMjYyNQS2

Operating margins for systems and hospitals continued to decline due to increasing expense pressures as well as slowing net patient revenue growth across all rating levels.


KEY TAKEAWAYS

Strong balance sheets and capable leadership continue to lead the way for stable success.

M&A activity has bolstered the financial standing and credit ratings of not-for-profit health systems.

Not-for-profit systems are outnumbering stand-alone hospitals through increased M&A activity.

Stand-alone hospitals experienced their second consecutive year of negative outlooks.

Not-for-profit health systems and stand-alone hospitals have maintained generally favorable bond ratings due in large part to strong balance sheets, despite the continual decline in operating margins and cash flows.

S&P Global Ratings released research this week on the financial status of not-for-profit health systems and stand-alone hospitals in 2017.

The sector remained consistent in several year-to-year, such as improving days’ cash-on-hand levels and marginal reduction in debt levels, though the study found that the underlying pressures on not-for-profits are beginning to take their toll. The operating margin for the sector declined from 2.4% in 2016 to 1.8% in 2017.

S&P also noted that not-for-profit health systems continue to outnumber stand-alone hospitals and received stronger overall ratings from the agency.

RATINGS ACTIONS FOR THE SECTOR THROUGH JUNE 22:

  • 152 total affirmations
  • 16 total upgrades, though six upgrades were driven by systems merging together.
  • 15 total downgrades

S&P said a major factor that allowed health systems and hospitals to weather financial challenges last year was the combination of strong balance sheets and leadership. 

CREDIT STRENGTHS OF NOT-FOR-PROFIT SYSTEMS:

  • Robust M&A activity has improved the financial profile for systems.
  • Despite the same challenges with maintaining an overall patient base, systems have experienced a growth in outpatient services.
  • Sizable investments in information technology have resulted in strong credit ratings.

S&P analysts said that stand-alone hospitals featured stronger medians than systems but found they are weakening. This is due to softer patient volumes, a weakening payor mix combined with increased pressure from commercial payors, and labor expenses. 

HOW STAND-ALONE HOSPITALS PERFORMED:

  • While the amount of stand-alone hospitals are shrinking, they produced stable balance sheets that were noted as a “principal strength of financial profile.
  • Debt levels fell due to declining unrestricted net assets.
  • However, negative operating margins appeared in BBB rating levels.

 

Rising Uninsured Rate Expected to Stress Margins of Nonprofit Providers

https://www.healthleadersmedia.com/finance/rising-uninsured-rate-expected-stress-margins-nonprofit-providersImage result for Uninsured

More than 4 million people have lost coverage in the past two years, including many lower-income adults. That could prove problematic for safety net hospitals in the near future.

The ongoing efforts to destabilize the Affordable Care Act will adversely affect the operating margins of not-for-profit healthcare providers, according to a new analysis from S&P Global.

S&P analyst Allison Bretz said that over time, “a growing uninsured population could be a credit negative for not-for-profit hospitals and health systems, as these facilities would likely see an uptick in self-pay patients, charity care and bad debt.”

Two years into the Trump administration’s efforts to roll back the ACA, the uninsured population has risen from about 12.7% in 2016 to 15.5% in 2018.

A study by The Commonwealth Fund estimates that 4 million people have lost health insurance since 2016, and that the uninsured rate among lower-income adults rose from 21% in 2016 to 25.7% this spring.


“This will be most acute at safety-net providers and other providers with a high concentration of Medicaid patients, as that population is most vulnerable to many of these changes,” Bretz said in remarks accompanying the report.

Beth Feldpush, senior vice president of policy and advocacy for America’s Essential Hospitals, said the report “underscores concerns we’ve had since last year’s attempts to repeal the ACA and, now, with piecemeal changes that have weakened the law.”

“Many of the people who lose coverage seek care at our hospitals, which adds to uncompensated costs and puts more pressure on our members’ already low operating margins,” Feldpush said. “Because essential hospitals, by their mission, turn no one away, this could prove financially unsustainable for some.

Although active efforts to repeal the ACA in Congress have slowed in the past year, it is facing one of its greatest threats, as a federal judge in Texas hears a lawsuit brought by 20 states that challenges the constitutionality of the sweeping healthcare law.

For-profit, Payer Outlook Stable

While the rising uninsured rate could prove challenging for not-for-profit providers, S&P analyst David Peknay said it should have little effect on for-profit providers.

“The for-profit companies we rate have been reporting some increase in uninsured patients, consistent with national trends, but the impact on ratings is also currently immaterial,” he said.

The losses in covered lives for health insurance companies is offset by other factors, said S&P analyst Joseph Marinucci.

“A key contributing factor is the sustained migration of the government-sponsored insurance segments toward coordinated care (Medicare Advantage and managed Medicaid), which is expanding the market opportunity for health insurers,” Marinucci said.

“We expect ratings in the insurance sector to remain relatively stable in the near term despite the growth in the number of working-age uninsured individuals,” he said.

 

 

 

 

 

Strong Market Bolsters Not-For-Profit Pensions

http://www.healthleadersmedia.com/finance/strong-market-bolsters-not-profit-pensions?utm_source=edit&utm_medium=ENL&utm_campaign=HLM-Daily-SilverPop_03292018&spMailingID=13219554&spUserID=MTY3ODg4NTg1MzQ4S0&spJobID=1362682914&spReportId=MTM2MjY4MjkxNAS2

Image result for hospital pension plans

 

S&P forecasts lower near-term statutory minimum requirements for defined benefit plans, which could help financial profiles for not-for-profit healthcare providers.

The nation’s not-for-profit healthcare sector has benefited from a boost in the funded status of its pension plans in fiscal 2017 due primarily to robust investment market returns, according to a report this week from S&P Global Ratings.

This boost is occurring, S&P said, despite lower assumed discount rates in recent years, which provide a more conservative liability measure.

In the near term, S&P said a higher funded status should mean lower statutory minimum contributions to defined benefit pension plans, which could help overall financial profiles as operating performance in the healthcare sector has come under stress.

“However, the projected benefit obligation for many plans has continued to increase and many have had to contend with updated mortality tables, which more accurately recognize longer lives — which leads to increased pension liabilities,” said S&P credit analyst Anne Cosgrove.

Cosgrove said many not-for-profit issuers have focused on lowering pension funding risks, including increasing annual contributions to improve the funded status, closing current plans to new participants, freezing plans, and in some cases terminating plans altogether.

S&P has tracked the funding levels of defined-benefit plans of not-for-profit hospitals and health systems since 2007, when, on average, they were at their highest level (at 90%).

Funded statuses declined sharply in 2008 and 2009, by 20 percentage points during the Great Recession and the cratering of global investment markets. After the recession, funded ratios were essentially flat at near 70% through 2012, despite hospitals’ healthy contributions to plans, S&P said.

Hospital Distress to Grow If Congress Closes Door to Muni Market

https://www.bloomberg.com/news/articles/2017-12-08/hospital-distress-to-grow-if-congress-closes-door-to-muni-market

  • Small, lower-rated facilites could see costs rise 1-2 percent
  • At least 26 non-profit hospitals already in default, distress

As Congress moves to assemble the final version of its tax plan, projects like Spooner, Wisconsin’s 20-bed hospital hang in the balance.

The rural community, about 110 miles (177 kilometers) northeast of Minneapolis, sold tax-exempt bonds to build the $26 million facility it opened last May. The hospital’s chief executive officer said that if its access to such low cost financing had been cut off it would have paid over $6 million more in interest.

That may soon be an expense that other hospitals across the country will have to shoulder. The House’s tax legislation revokes non-profit hospitals’ ability to raise money in the municipal market, where investors are willing to accept lower interest rates because the income is exempt from federal taxes. That’s threatening to saddle health-care providers with higher borrowing costs at a time when their finances are already under pressure.

“Should tax-exempt financing not be available in the future, it may really harm our ability to build affordable senior housing and assisting living facilities,” said Michael Schafer, Spooner Health’s CEO.

For small, rural hospitals across the country, labor, drug, and technology costs are increasing faster than the revenue and patients’ unpaid debts are on the rise. Higher financing costs would be one more challenge.

David Hammer, head of municipal bond portfolio management for Pacific Investment Management Co., said the loss of the tax-exemption could raise borrowing costs by 1 to 2 percentage points at small facilities with a BBB rating or below. That “could have a meaningful impact on their balance sheets,” he said.

At least 26 non-profit hospitals are already either in default or distress, meaning they’ve notified bondholders of financial troubles that make bankruptcy more likely, according to data compiled by Bloomberg. That includes falling short of financial terms set by their debt agreements and having too little cash on hand.

Many of them are based in rural communities where the populations tend to be “older, poorer and sicker,” according to Margaret Elehwany, the vice president of government affairs and policy at the National Rural Health Association. She estimates that about 44 percent of rural hospitals operate at a loss. There have been at least seven municipal bankruptcy filings by hospitals since last year, the most of any municipal sector excluding Puerto Rico.

The risk that Congress will prevent hospitals from accessing the municipal market worries Dennis Reilly, the executive director of the Wisconsin Health & Educational Facilities Authority, an agency that issues debt for non-profits such as Spooner Health.

“All of us in the industry were completely blindsided by the House proposal,” Reilly said in an interview from Washington, where he was meeting with members of Congress about the proposed bill.

“Without tax-exempt financing, not-for-profits across the country will have increased borrowing costs of 25 to 35 percent because they’ll have to access the taxable market,” he said. “For many of the rural providers like Spooner, much of their project they would not have been able to do with the higher cost of capital.”

A Rush to Beat the Clock

Hospitals are among those rushing to issue tax-exempt debt while they still can. Mercy Health, a Catholic health-care system that operates in Ohio and Kentucky, is scheduled to sell $585 million tax-exempt bonds next week. The deal, originally planned for early next year, was moved up after the release of the House proposal.

Spending more on debt would cut into the funds available for facilities, equipment and charitable outreach, like programs for opioid addiction, according to Jerome Judd, Mercy’s senior vice president and treasurer. “Things like that are impacted,” he said.

At least some members of Congress share the hospital executives’ concerns. Last month, some Republican lawmakers sent a letter to leadership pushing for the final plan to preserve the ability of hospitals and other entities, like affordable housing agencies and universities, to issue tax-exempt bonds.

“Private activity bonds finance exactly the sort of private public partnerships of which we need more of, not less,” they wrote. “These changes are incompatible with President Trump’s priority for infrastructure investment in the United States.”

It’s Tough to be Small

Some hospitals already opt to sell their bonds in the taxable municipal market to avoid disclosures and restrictions over how the proceeds are used, though they are typically larger entities that can secure advantageous rates because of the size of their deals. Patrick Luby, a municipal analyst at CreditSights, said smaller clinics with only a few million of bonds to sell would have a hard time accessing that market, which attracts corporate debt investors accustomed to big issues.

“Even what we would consider a large deal in the muni market is almost an odd lot in corporate bonds,” he said. “Very large hospital chains, large household name universities — global investors will buy those names, but they’re not going to buy a $15, $25, $50 million local hospital.”

If the House plan is enacted, hospitals “will have a really difficult time accessing the market,” he said.

 

Fitch issues negative outlook for nonprofit hospitals: 4 things to know

https://www.beckershospitalreview.com/finance/fitch-issues-negative-outlook-for-nonprofit-hospitals-4-things-to-know.html

Image result for negative hospital outlook

Fitch Ratings’ outlook on the nonprofit healthcare sector is negative for 2018, as the sector faces regulatory, political and competitive challenges.

Here are four things to know about Fitch’s outlook on the sector.

1. Fitch expects nonprofit hospitals and health systems’ profitability to continue to weaken over the next year. “Growth in Medicare and Medicaid volumes are weakening provider payer mixes at a time when providers are moving from volume-based reimbursement in greater numbers,” said Fitch Senior Director Kevin Holloran.

2. Fitch said several factors could adversely affect lower-rated hospitals’ operating performance in 2018, including growing pressure on salaries and continued erosion in payer mix.

3. The proposed tax overhaul bill, which would hamper nonprofit hospitals’ ability to issue tax-exempt revenue, could further pressure the industry, according to Fitch.

4. Although the nonprofit healthcare sector outlook is negative, Fitch maintained its stable outlook for ratings of healthcare issuers. “Fitch anticipates our revised criteria for the acute care sector will be published early next year, which should lead to an above-average, but still balanced, degree of rating movement during the year,” the debt rating agency said.