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Healthcare Business News

Fitch lowers not-for-profit hospital outlook to negative

By Beth Kutscher
Posted: December 12, 2013 - 6:30 pm ET

Fitch Ratings has lowered the outlook on not-for-profit hospitals to negative for the first time since 2009, with little optimism that expanded insurance coverage will ease the pressure on strained operating margins.

James LeBuhn, who heads Fitch's not-for-profit healthcare group, said he expects to see more volatility in earnings results next year, as providers grapple with soft volumes and reimbursement cuts stemming from sequestration and possible performance penalties under the Patient Protection and Affordable Care Act.

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The financial performance of hospitals and systems will depend largely on how quickly they can cut costs, flex staffing requirements and create clinical and operational efficiencies—even if it means taking a hard look at which services are offered.

Along those lines, Fitch also expects a greater number of downgrades on individual credit ratings, LeBuhn said on a client call, although the majority of ratings are expected to be reaffirmed.

“We'll continue to see traditional M&A, but we also expect to see growth in what we call soft alignment,” he said, citing non-ownership affiliations such as Stratus Healthcare in Georgia and AllSpire Health Partners in New Jersey and Pennsylvania.

About 365,000 people have bought insurance through an insurance exchange in the first two months that the marketplaces were operational. That number—far below projections—may increase, but Fitch is still “somewhat suspect” that the coverage expansion will mean greater profitability, LeBuhn said.

He added that the majority of plans expected to be sold will be “silver” or “bronze” plans—which means they'll have significant cost sharing, which could lead to increased bad debt for providers.

Moody's Investors Service last month also affirmed a negative outlook on the not-for-profit healthcare sector, for the sixth straight year.

Hospitals are being hit on a number of fronts including expenses that are outpacing revenues, a 1.3% cut to Medicare rates, reductions in disproportionate share hospital payments that went into effect Oct. 1, and modest increases in commercial payments that are “far below historic levels,” the agency said.

Moody's also pointed out that more care is being delivered in outpatient settings, where reimbursement is lower. At the same time, systems are spending heavily on information technology and acquiring physician practices, even though the payoff for those investments is uncertain.

“What all this boils down to is low revenue growth,” said Daniel Steingart, a Moody's analyst. Revenues are expected to increase just 3% to 3.5%, far below the 5.2% providers saw in 2012. “The thing to think about is that they're anticipating all these changes against a very challenging environment.”

Follow Beth Kutscher on Twitter: @MHbkutscher

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