The main finance story this year will be the continued decline in hospitals' operating performance.
Even with the revisions to the federal payment policies contained in the fiscal 2000 budget, the outlook could be dim for some of the weaker institutions in the industry. There were more hospital closures in 1999 than in any year in recent memory.
The situation is truly dire for certain overextended organizations. Take Catholic Healthcare West, for example. This 48-hospital behemoth lost $310 million in the fiscal year ended June 30, 1999. It lost a cumulative $500 million in the past three years and is nowhere near returning to operating profitability.
Fitch IBCA, a New York-based credit-rating agency, downgraded CHW's bonds by two notches in November 1999. Now they are just three notches above "junk" status. Leading factors in the company's poor performance: a hugely expensive consolidation of the back office, Y2K-related expenses, losses on physician practices and lousy contracts with managed-care companies.
Its $4 billion in revenues notwithstanding, CHW has derived no apparent advantages from its heft. If anything, its size has blunted its strategic direction.
But as large hospital groups shed their owned physician practices, dump or rewrite capitated contracts, and retreat from ill-considered capital projects, they may be able to stanch the losses and return to a modicum of stability.
It is hard to square these tales of woe with the recent report from the Medicare Payment Advisory Commission that the hospital industry made an 11% margin on Medicare business in 1997. Of course, much has changed in two years. Yet that average conceals the widening gap between hospitals making money and those losing money on Medicare and other contracts. The weak hospitals may continue to decline until they founder completely.
In the next year it will be useful to pay attention to the number of new bond finance issues. If new issues decline precipitously, hospitals may find themselves starved for capital and unable to make the kinds of investments in infrastructure, service improvements and information technology that they're used to.
The investment bank Cain Brothers does not foresee a speedy turnaround for the healthcare industry. Profits in two segments of healthcare-physician practice management companies and for-profit hospitals-have crashed by more than half since 1996.
Cain Brothers rates the industry a "long-term hold" and expects it will take five years before hospitals return to higher profits. Pressures from government cutbacks and managed-care penny-pinching are likely to be unrelenting. "There are no easy fixes as there were when DRGs were enacted," Cain Brothers notes.
Meanwhile, at Standard & Poor's the outlook is generally negative. In 1999 the New York-based credit-rating agency made three times as many downgrades as upgrades on hospital bond issues. S&P predicts many more mergers will fail. In the wake of such catastrophes as the breakup of the UCSF Stanford Health Care merger, the stand-alones don't look like wallflowers any more. "Low cost structure and great liquidity are going to get (hospitals) through a lot of these problems," says S&P analyst Susan Hill.
The other big ratings house, Moody's Investor Service, takes perhaps the darkest view of the future. The overall outlook for the 500 hospitals and systems it rates is negative. Credit ratings will deteriorate; bankruptcies will increase.
"Hospital bankruptcies only mean the bondholders don't get paid," says Moody's Dennis Farrell. "It doesn't mean the hospitals go away."
Was that the good news or the bad news?