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By Monica E. Oss

“Providers wont’ be able to ward off the stress much longer. We believe increasingly negative trends in the U.S. not-for-profit health care industry will fuel credit quality through at least next year, resulting in more downgrades than upgrades for the balance of the year and in 2014…. weaker providers will likely see ongoing operating margin and cash flow erosion and eventually balance-sheet pressure leading to rating deterioration.”

That was from J. Kevin K. Hollaran’s piece, “The Outlook For U.S. Not-For-Profit Health Care Providers Is Negative From Increasing Pressures”, in the January 8, 2014 issue of Credit Week. The bottom line: “Negative pressures at U.S. not-for-profit hospitals and health systems are accelerating, and after a period of strong and steady recovery from the recession and financial crisis of 2008, our outlook for the sector is now negative. We expect downgrades to exceed upgrades in 2014.”

That was January.  Just last week, a new report, U.S. Not-For-Profit Health Care Stand-Alone Ratios: Operating Margin Pressure Signals More Stress Ahead, released by Standard & Poor’s Rating Services, said that “operating margins and lower patient volumes” are threatening small and stand-alone nonprofit hospitals (see Reuters’ report coverage, Nonprofit Hospitals At A Tipping Point From Mounting Challenges). The warning that has grabbed the most attention was that the health care sector was at “a tipping point where negative forces have started to outweigh many providers’ ability to implement sufficient countermeasures.”  In short, the bankers are having a crisis of confidence in lending to health care provider organizations, which means that lines of credit and capital for new programs and financing growth will be less available and more expensive.

What are the lenders worried about? Martin Arrick, managing director in the corporate and government ratings group at Standard & Poor’s, spoke at a recent conference (see 6 Revenue Pressures Create Negative Outlook for NFP Hospitals) and identified six financial challenges for hospitals that render hospital cost cutting attempts “a day late, a dollar short.”  His list?

1. Declining utilization – The combination of more managed care and more consumers paying more out of pocket has a big impact on utilization. For consumers, the more they pay out-of-pocket, the more likely they will adopt “comparison shopping” tactics. This demand for transparency will result in some organizations being unable to compete (see Is It Time For Some ‘Comparison Shopping’? and What Can Your Management Team Learn From Black Friday?).

2. Defined contribution health benefits – As employers adopt defined contribution health benefits (a set amount of money for use on private health insurance exchanges) for their employees, insurance customers will seek low premiums, resulting in high-deductible health plans and reduced utilization (see 40% Of Families Covered By High Deductible Health Plans Delay Needed Care For Children With Chronic Health Conditions Due To Cost).

3. Increased competition – As both the number of consumers and the reimbursement rates for those consumers diminish, hospitals will need bigger service area footprints for sustainability. This will create more competition, and clearly, not all hospitals can benefit from competing for fewer consumers (see What Is Your Organization’s ‘Strategic Inflection Point’?).

4. Pressure on capital operating budgets – Competing in the future will require the appropriate tools, and in health and human services this means information technology (IT), for both service delivery and participation in ACOs. But while IT can bring better efficiencies and cost cutting, that success is neither overnight, nor guaranteed. In the meantime, adopting the necessary IT takes money today, adding to budget pressures (see Budgeting For Technology: How Much Is Enough?).

5. Observation status – The Centers for Medicare & Medicaid Services (CMS) rules regarding observation status and its lower reimbursement rate, is a financial hit for any inpatient facility.  Couple that with RAC audits to provide medical necessity, and this is a big challenge to hospital sustainability (see Audits Inch Closer, Balancing Workflow Solutions With Fraud Risk and Hospitals’ Use Of Observation Stays & Short Inpatient Stays For Medicare Beneficiaries).

6. State budget concerns – The “woodwork effect”, when people who would have qualified for Medicaid before the expansion of eligibility guidelines actually sign up under Medicaid expansion, will put state’s unprepared for the short-term rise in consumers under pressure to pay for the services – potentially  leading to rate cuts.  I would also add that the challenge for hospitals in states that did not expand Medicaid – coupled with the reduction of disproportionate share payments will also provide a financial challenge to hospitals (see Controlling Health Care Costs Through Confusion and How Many Insurers Are Using The New Marketplaces? and What Is DSH & Why Should You Care?).

This is health care from the bankers’ perspective.  What concerns me is the quote in the Standard & Poor’s report – “most providers have already made the easier adjustments to manage these changes….” If the past few years have been the “easy ones”, all that comes to mind is that great Bette Davis quote in the classic movie “All About Eve” – “Fasten your seat belts. It’s going to be a bumpy night.”

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