Outlook 2014: Not-for-profit hospitals

Not-for-profit hospitals enter 2014 with continued pressure on revenue growth and operating margins. Not all will get through the year without a hit to their finances or the need for a partner, industry experts say.

Even the anticipated boost in revenue from the expansion of health insurance under the Patient Protection and Affordable Care Act is not without complications and uncertainty. Millions of uninsured are eligible for subsidized commercial insurance or, in some states, Medicaid, but it's unclear how many will stay uninsured and how much hospitals will be paid to treat those newly insured under the law, analysts say.

The year ahead is crowded with many of the same challenges as prior years, analysts reported in year-ahead outlooks. But many hospitals have fewer options to bolster operations after scrambling to improve efficiency following the Great Recession. Standard & Poor's, in a report to lenders as 2013 closed, described the coming year as “at the tipping point—where an increasing number of organizations will find themselves weighed down by issues that outstrip their ability to implement sufficiently robust positive countermeasures.” All but the strongest hospitals will see margins shrink, the agency said.

See a slideshow of the people to watch in 2014

Revenue growth at hospitals will continue to drag as more patients get more care without a hospital visit and as payments from insurers grow marginally—if at all. Medicare paid hospitals less last year, under the sequestration deal. Meanwhile, private insurance companies grudgingly awarded marginal increases, an analysis from rating agency Moody's Investors Service said. Those same Moody's analysts also estimate that health plans sold in Affordable Care Act exchanges will pay hospitals 20% to 30% less than other commercial plans.

Hospitals that treat large numbers of uninsured patients also will operate in 2014 with sharply smaller subsidies from Medicare, known as disproportionate-share payments, which were cut under the Affordable Care Act.

Curt Whelan, managing director with consultant Huron Healthcare, said hospitals that have squeezed savings from basic operational expenses such as labor and supplies now face the more difficult task of strategically reorganizing operations, such as health systems that may consolidate a specialty spread across multiple locations and closing or opening services in new geographic locations, to bolster revenue and reduce costs.

Hospitals also face a challenge as the sector seeks to reduce wasteful utilization but continues, for the most part, to be paid by commercial insurers for the volume of hospital care they provide, he said. In the coming year, some will try and fail to strike a balance between revenue loss from reduced hospital use and the shift in payment from volume to value. That will force some into merger and acquisition deals, he said.

Hospitals' revenue may have slowed, but they continue to invest in doctors, information technology, deals and diversification. Those investments come with risk, analysts said, but also may better position hospitals for changes to healthcare payment and delivery that are expected to accelerate this year. That includes more insurance contracts that pay for performance on quality and cost-control measures, rather than based on the volume of care hospitals provide. The Affordable Care Act tests such contracts under Medicare, and private insurers have adopted more risk-based payment models.

Fitch (Ratings) anticipates a higher level of year-over-year volatility within the sector as the full effects of health reform are fully realized and reflected in erratic volumes and shifting reimbursement models,” the agency said in its outlook for the sector, which was lowered last month to negative from stable.

Follow Melanie Evans on Twitter: @MHmevans