Moody's Investors Service, the powerful bond-rating company, last week issued a pessimistic report on not-for-profit hospitals in Pennsylvania's two largest markets.
Severe overcapacity in Philadelphia and the near monolithic power of Blue Cross of Western Pennsylvania in Pittsburgh likely will keep providers in both cities at the not-so-tender mercy of insurers for the foreseeable future, Moody's said.
As a result, Moody's predicted bond rating volatility and heightened financial risks for hospitals in both cities.
Moody's painted the bleakest picture for Philadelphia. Extreme overbedding and slow consolidation have led to intense price competition among health systems there. Managed-care penetration in Philadelphia hit 32% last year, Moody's said.
And, on the other side of the negotiating table, Aetna U.S. Healthcare and Independence Blue Cross control 80% of managed-care lives and aren't shy about using their muscle, Moody's said. Therefore, Moody's has issued a negative outlook for the Philadelphia market, with "the worst yet to come."
Overcapacity persists despite mergers that have rapidly built four sizable networks: Allegheny Health, Education and Research Foundation; University of Pennsylvania Health System; Temple University Health System; and Jefferson Health System.
Blinded by their prestigious histories, most Philadelphia hospitals "rather than consolidate . . . have instead concentrated on the pursuit of affiliations for joint managed-care contracting," Moody's said.
Only AHERF among them has made much progress in eliminating overhead and reducing duplication, through the combination of Hahnemann University and Medical College of Pennsylvania, Moody's said.
To drive the economic point home, Moody's noted that Philadelphia hospitals staff 3.85 beds per 1,000 population compared with 2.26 per 1,000 in Sacramento, Calif., a mature managed-care market.
"I think Moody's in its steely-eyed way is pretty much correct: We've met the enemy, and it is us," observed John McMeekin, president and chief executive of Crozer-Keystone Health System in Media, Pa.
In Pittsburgh, Moody's said, the financial outlook for hospitals is somewhat better but unpredictable.
Because Blue Cross of Western Pennsylvania dominates the Pittsburgh market, its financial troubles are a source of worry for hospitals there, Moody's said. Last year, for instance, Blue Cross shifted 500,000 enrollees into HMO products. That resulted in double-digit declines in payments to some hospitals, the rating agency said.
Despite the move, Blue Cross had significant financial losses that will likely result in continued reduction of rates paid to providers, Moody's said.
Moody's report includes ratings for more than 50 Pennsylvania hospitals. In Philadelphia, the average long-term hospital bond rating is Baa1. For Pittsburgh hospitals, the average long-term bond is slightly higher at A3.