Low reimbursement, high expenses contribute to poor 2018 not-for-profit healthcare outlook

Reimbursement rate increases below inflation coupled with the continued swelling of staffing and technology expenses will put a damper on not-for-profit and public healthcare next year, Moody's Investors Service announced in its year-ahead outlook released Monday.

The firm downgraded the sector from its current stable status to negative for 2018. It predicts operating cash flow will continue to decline at the current rate of 2% to 4% over the next 12 to 18 months thanks to very low reimbursement rate increases, government payers comprising a larger proportion of overall business and expense pressure.

"We have an aging demographic in the country," said Eva Bogaty, Moody's vice president and senior credit officer. "So you have a lower revenue growth environment and we also have a high expense growth environment with expenses hitting a high 7.2% growth in fiscal 2016, and we're seeing that not really abate due to high labor costs."

Hospitals are seeing an ongoing shift in patient volume away from their inpatient operations, which tend to carry higher margins, in favor of outpatient care. Inpatient revenue growth is currently at 1%, where Moody's expects it will plateau in 2018. Between 2015 and 2016, by contrast, that was 2.4%.

While hospitals saw increased volume after the Affordable Care Act was implemented, that's now contracting. Patients are increasingly drawn to cheaper, high deductible health plans, which Moody's said could contribute to a rise in hospitals' bad debt in 2018. If Congress approves a tax reform bill that repeals the insurance mandate, Moody's said more people will go without insurance, which will drive up hospitals' bad debt even further.

Expanding association and short-term health plans, a decline in Affordable Care Act advertising and a shorter open enrollment window could all undercut hospitals' bottom lines, Moody's said. Hospitals could also get hit by the potential end of cost-sharing reduction payments to insurers and cuts to Medicaid Disproportionate Share Hospital program payments. Each of those changes would have different degrees of impact depending on the hospital, said Lisa Goldstein, Moody's associate managing director.

Moody's predicts the growth of government payers like Medicare and Medicaid will also dampen revenue growth next year. Those payers comprised 61% of gross patient revenue in 2016, up from 55% in 2006.

Expenses in the not-for-profit and public sectors are growing faster than usual. Expense growth hit a high of 7.2% in fiscal 2016, a measure that typically hovers around 5 or 6%. That's driven by nursing shortages and the need to hire more expensive temporary workers, physician and specialist hiring and the continued need to invest in and upgrade expensive information technology services.

To make matters worse, Moody's expects insurance carriers will likely raise rates about inflation and lower their coverage. A prominent example of that is Anthem's decision to no longer reimburse hospitals for certain outpatient imaging.

Hospitals should expect contracting with insurers to get tougher in 2018 as well, Bogarty said.

"We are hearing anecdotally across the country more tougher negotiation, sometimes more acrimonious negotiations as payers want to pull back on reimbursement rates," she said, "but yet hospitals can demonstrate rising costs … higher costs of delivering care. So there is a natural tension between provider and payer."

That tension increases the pressure smaller hospitals feel to merge with larger systems, which would give them more leverage in negotiations. Moody's predicts mergers, acquisitions and strategic alliances will continue at a rapid pace in the not-for-profit and public sectors next year, especially for rural or community hospitals in markets with Medicaid cuts or declining commercial insurers.