For-profits expected to withstand Medicare cut

Investor-owned hospital chains are expected to weather the impact of a 2% Medicare payment cut and other reimbursement pressures, according to credit rating agencies, which maintained a stable outlook on the sector.

In two reports released today, both Moody's and Standard & Poor's highlighted an operating environment filled with payment constraints and challenges to revenue growth. But the for-profit systems are expected to find new ways to reduce costs and gain revenue streams, including through acquisitions.

Moody’s analyst Dean Diaz said in his report that earnings before interest, taxes, depreciation and amortization are expected to be squeezed for the remainder of this year, with either flat or 0.5% growth. Systems across the board are facing declining patient volumes, fewer patients with higher-paying commercial insurance and increased bad debt expense.

However, next year—when key provisions of the Patient Protection and Affordable Care Act go into effect—some of those trends could be reversed.

Diaz also highlighted continued regulatory scrutiny on admissions as well as patients who forgo non-urgent care as risk factors.

At Standard & Poor's, analyst David Peknay said in his report that reimbursement risk remains one of the most important factors in determining the credit rating of healthcare companies. But he added that investor-owned companies have been actively monitoring their business to negate at least some of the impact from payment cuts.