Fitch Ratings has lowered its 2014 outlook for the not-for-profit healthcare sector to negative, and Moody's Investors Service affirmed a negative outlook for the sixth year in a row. The agencies blame shrinking patient volumes, slowed revenue growth and escalating expenses.
“The sector has done a phenomenal job keeping up with changes since the recession,” Arrick said. “CFOs have been on a journey to cut costs, lower capital spending and meet the challenges of lower revenue. But we noticed last year that a lot of organizations are beginning to lose that battle.”
One of the battles is against tightening revenue streams from an army of different factors. Pressures on revenue include a 1.3% cut to Medicare rates, a reduction in disproportionate-share payments that became effective Oct. 1 last year, and flat or declining inpatient volumes.
Significant changes, including the emphasis on population health management and a shift toward observation status over inpatient admissions, are driving the trend of weak or declining utilization, Arrick said. “Sometimes you're shooting yourself in the foot while you're doing the right thing,” he said.
Meanwhile, as high-deductible insurance plans become increasingly common, cost consciousness on the part of consumers is also affecting hospitals' top and bottom lines as patients paying higher out-of-pocket costs choose to postpone or skip certain procedures.
“Healthcare demand is not as inelastic as we thought,” Arrick said.
But even with the pressures on revenue, healthcare organizations are spending money on information technology infrastructure and physician practices, areas that require significant capital outlay now but that analysts see as providing benefits over the long term.
Activity around mergers and acquisitions, not just of physician practices, but of other hospitals and systems, is also expected to continue, according to all three agencies. But Arrick cautions that as the agencies upgrade individual credit ratings as a result of M&A, these are often false positives as weaker systems are absorbed into stronger ones.
“Downgrades are really exceeding upgrades,” he said.
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