Moody’s Investors Service sees the outlook for the not-for-profit and public hospital sector as stable, reflecting its expectations for the fundamental business conditions in the sector over the next 12 to 18 months.
Operating cash flow growth will continue to grow but at slower rates than over the last two years. Growth of about 3 percent is expected over the next several quarters.
Favorable business conditions will ensure low rates of uninsured and growing patient volumes. But expenses are rising because of increasing drug costs and continued investments in staffing and population health strategies.
Moody’s key points include:
- Operating cash flow is growing at about 3 to 4 percent, which is in line with historical averages. The growth rate will moderate slightly but will remain positive over the next several quarters. Factors contributing to slower operating cash flow growth include rising expenses, shifts in payer mix toward government payers and a stable number of people with insurance that is not showing the significant gains of the last two years.
- The uninsured rate may increase because insurance exchanges are “showing signs of stress” with most insurers losing money on exchange-sold plans. Several large commercial insurers are participating in substantially fewer markets and many not-for-profit co-ops, established to compete with traditional insurance companies, have failed.
“It is credit negative to not-for-profit hospitals if healthcare insurers cannot make money on the exchanges because insurers will participate in fewer exchanges.” This may make it difficult for individuals to find health insurance and potentially reduce the number of people with insurance coverage.
- Bad debt in Medicaid expansion states continues to decline, but at much lower rates than in recent years. Bad debt declined nearly 15 percent in Medicaid expansion states following implementation of the Affordable Care Act. However, bad debt in non-expansion states has grown in recent quarters.
- Several more states have expanded Medicaid or announced intentions to do so over the past year.
- Changes to reimbursement rates remain a long-term challenge. As reimbursement slowly shifts to value (i.e., quality outcomes play a greater role in hospital payments) from the fee-for-service model, hospitals experience a downward pressure on financial performance. Most hospitals are investing in physician practices and technology that enable them to better coordinate patient care and assume financial risk for the health outcomes of their patients.
(Source: Outlook Stable as Cash Flow Growth Slows but Remains Positive, Moody’s Investors Service Outlook, July 28, 2016)
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