For years, investor-owned hospital companies have told investors of the increasing patient volume they expect when the baby boomers reach age 65. Then, last year, just months before the oldest baby boomers reached the magic age, healthcare reform became law, heralding some mitigation, if not an end, to the problem of providing uncompensated care.
But trends look good for hospital companies
Those two long-term trends are still expected to be positives for hospital companies, albeit ones still fraught with uncertainty, said Dean Diaz, a vice president and senior credit officer for Moody's Investors Service. In the meantime, however, for-profit hospitals face a tough environment on volume and pricing (See chart) and a host of investments that come with heavy upfront costs in return for very uncertain returns, Diaz said. In a report last week, Moody's said its outlook for the investor-owned hospital companies that it rates is stable but with a negative bias as a result of these factors.
The sluggish economy, especially the persistence of unemployment at 9%, continues to restrain patients from pursuing elective services, with Moody's citing a Kaiser Family Foundation survey from December in which half of respondents said they had delayed some sort of care because of the cost. Moody's predicted that benefit design changes will continue to push more financial responsibility on to patients, and that will continue to restrain utilization. Finally, as several investor-owned hospital companies have noted in recent quarters, the slow recovery from the recession has caused the birth rate to dip, which also reduces volume, Moody's said.
Regarding pricing, so far, the moderation of a commonly used metric, net revenue per adjusted admission, has been mostly because of shifts in payer mix, Diaz said—more patients from government programs and fewer with commercial insurance. But the concern for Moody's is rates won't increase as rapidly as they have in the past several years, he added. Much attention has been focused on the potential for steep Medicaid cuts later this year when extra federal support ends June 30, but managed-care and Medicare rates are also under threat, Diaz said.
“You'll start to see more pushback from the commercial insurers, and you're definitely not seeing the kind of increases from Medicare that you have in the past,” Diaz said.
As they reported their results for the quarter ended Dec. 31, hospital companies have been able to negotiate increases in their managed-care contracts in a range of about 4% to 8% annually, on par with recent years. Stock analysts have been asking for signs that managed-care companies are driving a harder bargain. Last week, Steve Filton, senior vice president and chief financial officer of Universal Health Services, answered the question this way: “Both providers and payers are going to the mat a little bit more than they were in the previous few years, but at the end of the day, from our perspective as a provider, the end results are still remaining within a range that is reflective of where we've been the past few years.”
The volume and pricing pressures both restrain the growth in net revenue. That puts most of the pressure for maintaining or expanding operating margins on controlling costs.
A common effort is to reduce the costs of surgical implants and devices by convincing physicians to use a smaller range of products and suppliers, thereby increasing volume discounts.
Labor costs remain a focus. Most of the companies report continuing success in reducing their use of expensive contract labor.
Vanguard Health Systems, Nashville, trimmed its corporate staff by 10%, shifting responsibility, and some jobs, to its regional health systems, according to the company. The cuts affect 21 people, according to a spokeswoman. “As we've grown over the last year, we've found incredible teams and resources in the regions that eliminate the need to have some of these functions clustered in Nashville, far away from patient care,” Kent Wallace, president and chief operating officer, said in a statement. “This reorganization is about focusing those services in the market.” Vanguard has acquired nine hospitals in three markets, including six-hospital Detroit Medical Center, in the last seven months.
Universal's Filton said the company reaped the benefits in the fourth quarter of unspecified job cuts made in the third quarter.
Longer term, Moody's sees the hospital companies as good bets, Diaz said. The aging of baby boomers won't mean a sudden increase in volume, but it should help slowly over time, he said. The increase could be lessened by the shifting of services to outpatient centers, he added. Reform should cover more patients, but Moody's wonders how many people will decide to pay the fines for failing to purchase coverage rather than shell out for costly insurance, Diaz said.
Hospitals are making a lot of investments in information systems, improving quality of care and aligning with physicians, Diaz said. All of these cost money upfront and could lead to either greater efficiency or greater volume, but the payoffs are very uncertain, he said.
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