In late August, Moody's Investors Service reported that not-for-profit hospitals have picked up the pace of reining in expenses. However, the ratings agency noted, that's not offsetting a slowdown in revenue growth. It's the second consecutive year that expenses outpaced revenue, putting not-for-profit providers in a tenuous position. The sector is also continues to see more downgrades than upgrades, according to Lisa Goldstein, associate managing director for Moody's public finance group. Goldstein recently spoke with Modern Healthcare finance reporter Tara Bannow and operations reporter Alex Kacik. The following is an edited transcript.
MH: Did the continued deterioration in hospitals' financial measures surprise you?
Goldstein: It really didn't. As you may be aware, every spring we run preliminary medians that we publish. In that March report, we were starting to see the continued pressure. The full report, which comes out every August, seemed to crystallize what we had expected, which was margin pressure. The margins are at some of the lowest levels that we have seen in a while, but that's more a function of expenses outpacing revenue. I don't know of any business or industry where you want higher expense growth than revenue. That's the heart of the issue—the mismatch between revenue and expenses that drag the margins down.
MH: There's been a flurry of downgrades lately. Can you talk a little bit about the ones you think have been the most significant?
Goldstein: For the year we are 18 down and nine up.
We annually track the number of downgrades to upgrades, and I believe there's only been four years in the past 20 where we've had more upgrades than downgrades.
Our prediction would be more downgrades than upgrades this year and we are well on the way with 18 down and nine up (as of August). Most are one-notch movements, but there are some multiple-notch movements for various reasons. We have some in oil and gas areas—that's been an economic reality for Louisiana, parts of Texas, parts of Mississippi. The price of oil seems to be rising, which is good for the local economy, but overall, that's been a pressure point.
MH: Why does that hurt healthcare specifically?
Goldstein: People lose their jobs, executives lose their jobs, the oil companies downsize—both the executive staff, as well as on-site drilling platforms. So they may get health insurance for one more year via COBRA and then they may become uninsured and self-pay. The economy, when it is relying on one particular industry, could contract pretty quickly.
MH: And with self-pay, you aren't getting a big percentage of that bill a lot of times.
Goldstein: Right, so it becomes bad debt or charity care.
Now, interestingly in Louisiana, the new governor ran on a platform to expand Medicaid and indeed the first week after inauguration he signed an executive order to extend Medicaid. What we've seen in Louisiana and Kentucky, which also expanded Medicaid a few years back, has been unlike most other states that have expanded. Most other states that expand, you have self-paying individuals who qualify for Medicaid, so hospitals went from receiving maybe no cents on the dollar to Medicaid reimbursement, which is a good thing.
In Louisiana and Kentucky, what we saw was many hospitals reported that individuals went from being commercially insured through their employer to the employer saying, “We're out of the healthcare insurance coverage business, go get Medicaid.”
So for many of those hospitals, we saw a shift from commercially insured to Medicaid—well-covered to moderately covered, kind of the exact opposite of pretty much every other state that expanded.
Ohio, which was an early expander, underestimated its projected numbers for additional coverage. There have been some pressures on Medicaid rates for Ohio providers.
Getting back to downgrades, there have been a few in Ohio for various reasons—merger-and-acquisition strategies, diversification into healthcare-related businesses. ProMedica, going into post-acute care, was one of the multi-notch downgrades. They made a big play into post-acute with an expensive acquisition of ManorCare, one of the largest national skilled-nursing chains. That was a three-notch downgrade because of an M&A strategy. The system is still investment grade.
MH: In terms of these rollups with bigger institutions buying smaller, somewhat struggling facilities, what are you seeing in terms of debt that they may take on? Are you seeing the benefits that they say will come in terms of savings?
Goldstein: The jury is still out on long-term savings. Day 1 integration is key to making these deals work. We've seen mergers go very smoothly; we've seen mergers over the years that have been wobbly coming out, and some have been very difficult.
We have said quite clearly that size matters. When you have size, it provides shock absorbers for unexpected events. When you're diversified in terms of geographic coverage, service lines, diversified within one big city with various facilities or nationally across the country, you can absorb a market hit because you have others to compensate. When you're small, you're much more exposed.
MH: There seems to be more pressure from state attorneys general looking at health systems. You have the lawsuit from California's AG against Sutter Health, for instance. Does that dynamic ever enter into your reviews?
Goldstein: Yes, though it's not new. I've been covering not-for-profit healthcare as an analyst for almost 30 years. These not-for-profits are profitable for the most part; they don't have endowments like a university, but they have liquidity.
From the municipalities' perspective, they provide fire and sewer and public safety, so why aren't these organizations paying some type of PILOT—which is payment in lieu of taxes.
Five or six years ago Morristown, N.J., was successful in its lawsuit contending that Morristown Medical Center should pay a PILOT. So we said, “OK, who's going to be next?”
It's come up over the years, but there has not been a widespread, “That's it, all not-for-profits fork over a PILOT.”
What's surprising to me as an analyst is you don't see a lot of other AGs or municipalities put the same pressure on not-for-profit colleges and universities. Most are not-for-profits with large endowments.
