Meanwhile, one popular move to prepare for changes under the Patient Protection and Affordable Care Act—hiring more doctors—will likely add to expenses.
Hospitals also can expect less from Medicare, which reduced inpatient payments last October. “This is just the beginning of Medicare pressures,” says Lisa Goldstein, a senior vice president at Moody's Investors Service who heads the ratings agency's healthcare team, of the October Medicare cuts for federal fiscal 2011 and anticipated cuts the next year. Medicare accounts for an average of about 40% of gross revenue among not-for-profit healthcare borrowers rated by Moody's, the ratings agency said in an August 2010 report.
An end to relief from the American Recovery and Reinvestment Act of 2009 will add to operating and capital challenges at hospitals. On June 30, states face the end (after one hard-won extension) of the federal economic stimulus relief for Medicaid.
Martin Arrick, a managing director for Standard & Poor's, says more merger-and-acquisition activity is expected. He says small hospitals that haven't done deals in years are considering talks with nearby hospitals. Meanwhile, systems are evaluating their geographic reach, he says. “We are beginning to see a little bit broader strategic review,” he says.
At the end of 2010, credit markets for not-for-profit healthcare borrowers were somewhat volatile and more expensive after Congress did not extend stimulus provisions that increased access to financing.
The Build America Bonds program and a tax incentive for banks to make small tax-exempt loans were scheduled to expire Dec. 31. Unless proponents, including the American Hospital Association, convince the incoming Congress to reinstate the programs, tax-exempt finance analysts with Citigroup said in December that borrowers could see higher long-term yields as borrowers no longer able to issue Build America Bonds return to tax-exempt bonds. That would boost the supply of bonds and give investors more leverage to demand higher interest rates.