Not-for-profit hospitals' financial outlook has stabilized thanks to a significant pay raise from the CMS and the extended delay of the Medicaid disproportionate share payment cuts, a new Moody's Investors Service report concluded.
Operating cash flow will grow 2% to 3% next year, driven by the highest Medicare reimbursement rate increases in around a decade, Moody's said in the report as it changed its outlook from negative to stable. Although industry observers are still cautious as not-for-profit hospitals navigate price transparency mandates, threats to the Affordable Care Act, technology integration, rising Medicare and Medicaid volumes, and efforts to rein in drug prices as they pertain to 340B-eligible hospitals, among other hurdles.
The CMS estimates a $4.67 billion boost in hospital payments in its 2020 inpatient prospective payment system update, which will contribute to 4% to 5% higher top-line revenue, according to the report. Incremental increases in commercial rates in much of the country as well as patient volumes will also bolster revenue. Ongoing expense rationing is poised to improve cash flow, although labor shortages will likely offset some of those gains.
Another delay in Medicaid disproportionate-share hospital cuts to the tune of $4 billion will benefit many not-for-profit hospitals that care for large volumes of uninsured individuals and those covered by the government. That delay is expected until at least late 2020.
The cuts were mandated through the Affordable Care Act on the theory that uncompensated care would decrease as more gained coverage. But the rising cost of healthcare, along with the burden of high-deductible health plans and moves to undermine the ACA, have increased patients' and hospitals' financial exposure. The CMS' plans to cut Medicare reimbursement under the 340B drug discount program and site-neutral payment are also looming.
While many health systems have implemented cost-cutting strategies, digital patient-facing technology and revenue stream diversification efforts, a conservative approach is still warranted, said Gurpreet Singh, a partner at PricewaterhouseCoopers and leader of its health services sector.
"I generally agree that those health systems are better set up for success, but I would expect technology investment not to decrease but increase," said Singh, adding that hospitals must manage that technology investment in the context of pricing growth and other broader trends. "There has to be a real focus on understanding how to get the most value out of the technology."
Additional cash flow may fuel mergers and acquisitions, analysts said. Moody's expects M&A activity to pick up as hospitals look to gain leverage with commercial insurers. Smaller hospitals will also benefit from buyers' access to capital and information technology, according to the report.
Analysts noted that slight commercial reimbursement rate increases will lift revenues. But hospitals in some markets indicated that commercial insurers are increasingly denying reimbursement or requiring significantly more documentation before paying claims, increasing revenue-cycle costs.
Patient volume will continue to grow, although at slower rates, Moody's predicts. More will shift to the outpatient sector and to observation stays, which will curb revenue.
Hospitals stand to lose revenue if baby boomers shift to Medicare over the next decade and drop commercial insurance, analysts said. Medicare patients accounted for 46.8% of not-for-profit hospitals' business in fiscal 2018, up from 44.1% in fiscal 2014, Moody's data show.
Meanwhile, wage growth has paled in comparison to deductible growth, increasing patients' and hospitals' exposure. Deductibles increased 162% from 2009 to 2019 while wages only rose 26%, according to data from Moody's, the Bureau of Labor Statistics and the Kaiser Family Foundation.
A shift from commercially insured to government-backed coverage typically doesn't lend itself to bottom-line improvement, said Jeff Goldsmith, national adviser for Navigant.
"Revenue growth is one half of making money, the other is not letting expenses grow more," he said. "That is the worry."
