Not-for-profit hospitals and healthcare systems struck a careful balance in 2012 with improved operational efficiencies that offset growing costs, lower volumes, and other financial pressures. However, that balance may be harder to sustain in 2013 and beyond, Standard & Poor’s Rating Services says.
With that in mind, S&P analyst Kenneth T. Gacka says the not-for-profit healthcare sector will likely see weakened median ratios in 2013 in the face of those continuing and growing incremental pressures that include healthcare reform.
“The 2012 medians reflect a continuation of the peak in metrics reached in 2011, but we expect ratios to soften gradually in the next one to two years as incremental pressures persist and even intensify amid industry changes related to healthcare reform,” Gacka says.
Gacka says many of the 144 health systems and 409 stand-alone providers rated by S&P over the past few years have undertaken many of the standard belt-tightening measures that have been seen across the healthcare sector, especially around staffing.
“Some places have had reductions in force, or they’re not filling vacant positions, or there is a real focus on full time employee management and making sure that hospitals are efficiently flexing their variable staff to volume trends. Those aren’t really new to the healthcare industry. Folks have been doing that for a long time and continue to do that… in addition to some of the non-salary things like renegotiating your supply contracts or different vendor contracts.”
With many of those efficiencies already cooked into hospital operations, Gacka says additional savings may be more difficult to realize.
“From our perspective in discussions with management, this has been going on for a number of years so you get to the point of how much longer you can take those things. Some of the low-hanging fruit is picked so it gets to the next level of additional efficiencies,” he says.
“In a lot of our discussions with management they recognize that and they are looking to really getting lean methodologies implemented in operations as well as looking for cutting the fat from the systems in terms of clinical variations, differences in practice, to get the harder-to-get structural savings out of the organizations.”
Some stand-alone providers in particular are experiencing weakening financial operating performance even in the face of revenue growth, a trend that S&P believes will be exacerbated with further declines in utilization, smaller rate increase for services, and continued investment in technology and physician compensation.
In such an environment, Gacka says he expects to see continued mergers and acquisitions in the not-for-profit hospital sector.
“You have a number of forces driving that,” he says. “One being the traditional benefit that you think of in terms of economies of scale, better negotiating clout and being able to fixed costs over a bigger revenue base; another is that as organizations prepare for the evolving healthcare environment, you have the push toward population health management and also growing vertically to give organizations that experience in managing the whole continuum of care, whether that be adding an insurance plan to get experience with risk.”
S&P analyst Martin D. Arrick says he doesn’t see things getting better in the not-for-profit hospital sector even if the 2% Medicare cuts mandated by sequestration is eventually resolved.
“There are so many forces. We call them ‘various incremental pressures’ but the key word is ‘incremental.’ Each one by itself is not the main driver, but taken together they are forcing the direction,” he says. “There is probably no one single thing if it gets reversed like the sequester that will change the fortunes of the broad sector and where it is going.”
“We are constantly on the lookout for stuff, but our view is that Medicare and government reimbursements are going to continue to be tight for an extended period of time. A sequester is part of that but annual update factors are a part of that, a broad movement to limit disproportionate share funding is part of that,” Arrick says.
“If you said every single government action gets reversed and we are going back to 3% rate increases, no sequester, bumper cash flows for DSH, that would be a lot of things going in the right direction. That is a big plus. If one thing gets turned around it’s great, people will be happy that one little piece of the cuts get changed. But no one thing changes the bigger picture that we expect overall performance to be compressed.”