Two years' worth of robust growth in inpatient admissions appears to be softening, prompting new concerns about the hospital industry's financial outlook.
Many hospitals and healthcare systems reported actual declines in admissions in the first half of the year, analysts said, while others reported slower volume growth. Hospitals cited a modest flu season, open-heart surgery declines as a result of stents, patients avoiding or delaying care because of higher deductibles and copayments, and a decline in the number of people with health insurance.
The admissions slowdown is expected to affect the credit ratings of not-for-profit hospitals and systems later this year. Investor-owned hospital companies have reported slower admissions growth this year as well.
"We're concerned that as this industrywide volume decline works its way through the third and fourth quarters, the credit deterioration may be more pronounced," said Bruce Gordon, senior vice president of healthcare at Moody's Investors Service. Moody's changed its stable 2003 outlook for not-for-profit hospitals last week, saying the industry is "moving toward negative."
Another rating agency, Standard & Poor's, said in its not-for-profit healthcare report that an admissions slowdown in the second quarter marks "perhaps a turning point" but cautioned that it is too soon to say whether the slowdown reflects "simply a `slow winter' or the beginning of a broader trend."
Already this year, the credit ratings of not-for-profit hospitals have been eroding. The three rating agencies reported that the ratio of downgrades to upgrades increased to about 4-to-1 in the first half, compared with 2.3-to-1 in the same period last year (See chart). Moody's said it was reporting the highest level of downgrade activity in a single quarter since 1998, which coincided with reimbursement changes in the federal Balanced Budget Act of 1997.
Cited in the downgrades were a variety of factors such as investment losses, increased debt, reimbursement pressures and loss of business to physician-owned facilities. Lack of cash was a major problem, factoring in the loss of investment-grade status for seven hospital or system credits in the second quarter and 11 multinotch downgrades, Moody's said.
Meanwhile, not-for-profit hospitals and systems with strong credit continued to tap the bond market, taking advantage of historically low interest rates. Healthcare bond volume in the first six months was $12.1 billion, up 8.7% from the year-earlier period, according to Thomson Corp., Stamford, Conn.