KirchheimerDespite some short-term improvements in operations and managed-care pricing, for-profit hospital companies will continue to face long-term challenges, according to credit-rating agency Moody's Investors Service.
The firms face uncertainty and credit risk stemming from continuing cost pressures and a lack of articulated long-range growth strategy, Moody's said in a report released last week.
Though not-for-profit hospital companies may be able to serve their constituencies on a break-even basis, for-profit hospital companies are expected to produce shareholder value. This is a difficult task when for-profits have slowed their acquisition pace and are struggling to grow through local market integration rather than simple addition of facilities.
The report's authors question whether shareholders will be satisfied with the slower rate of acquisitions. "If further industry consolidation makes sense, how and to what extent does it make sense?" the authors asked. "Once certain savings are achieved from reaching a critical mass, is there value to be gained in becoming bigger?"
Some of the for-profit hospital companies have seen their stock prices rise recently (See Finance, page 34). But they will need to find strategies for longer-term growth, according to Moody's, which rates 10 for-profit hospital companies that combined have about $20 billion in outstanding debt.
Also, a number of larger for-profit hospital companies have been able to negotiate more-favorable managed-care contracts and move away from capitation, but their rate increases have not kept pace with the managed-care companies' rate increases, the report said.
Overall, managed-care penetration is expected to increase in some markets while consolidation is expected to continue in others. Both could give managed-care companies more negotiating leverage with providers, according to the report.
The expected growth in managed care and slowdowns in government spending will also dampen revenue growth over time. Although for-profit companies have historically been better able to achieve economies of scale, cost-cutting will soon become more difficult, according to the report.
"The next level of cost-cutting activity, involving rationalization of clinical services, will present greater challenges," the report said. "In addition, rising medical costs associated with new pharmaceuticals and advances in medical technology will continue to compound the problem."