Ratings agency Standard & Poor's issued three reports last week that together describe the healthcare industry as doing well and likely to keep on doing so through 2006.
Hospitals and systems have benefited from improvements in areas such as revenue growth, patient volume, cost containment and moderating growth in malpractice costs, which together outweighed negatives in areas such as rising bad-debt expenses, according to the S&P reports.
The operating environment of the past 18 months was good enough that even systems with relatively weak finances have been able to improve their financial standing, according to S&P's research. Two of the reports analyzed median data for S&P-rated hospital and system providers and another was a generally positive outlook for the industry.
The forecast for a favorable environment in 2006 is a change for S&P, which as of January expected next year to be when the federal government would act on Medicare's funding woes, cutting into hospital revenue. That now seems less likely to happen soon, causing S&P to boost its 2006 outlook.
"I see this as a culmination of a positive trend that began two or three years ago," said Martin Arrick, a managing director with S&P, speaking at a teleconference. "We see that continuing without a doubt through the rest of this year," and probably continuing next year, he said.
The news wasn't all good. Bad-debt expenses continue to rise, and dealing with the growing number of uninsured patients, as well as lawsuits over uninsured patients, remain big issues for the industry, Arrick said. And Medicare is still likely to go under the scalpel sometime soon, most likely in 2007, according to S&P.
Nevertheless, median operating margins and cash positions among both standalone hospitals and health systems improved last year, according to S&P's analysis of 2004 audited financial statements (See chart). S&P's analysts also found that the recent positive financial performance by hospitals and systems trickled down even to lower-rated hospitals and systems, which wasn't the case in recent years. "There's really broad improvement up and down the line," Arrick said in an interview. "That to me is encouraging."
While a gap still exists between the prospects of hospitals and systems with higher debt ratings and those with lower ones, a number of speculative-grade groups were able to make headway in 2004, including Boston-based CareGroup and Detroit Medical Center, S&P said.
CareGroup's rebound arose from a multiyear restructuring at its three hospitals, which included a decentralization of the system, said John Szum, executive vice president and chief financial officer of the system. Detroit Medical Center, meanwhile, reaped the benefits of improved efficiency in its emergency room and from the recruitment of five leading cardiologists, said Michael Duggan, president and chief executive officer of the system.