May 9 (Reuters) - Nonprofit hospitals in the United States face a future of rising costs and dwindling funds as the healthcare reform is implemented and the Congress battles over the budget, according to a Moody's Investors Services report released on Wednesday.
To survive what the rating agency is calling a "transition period," the hospitals, which frequently provide free or discounted care for lower-income patients, will have to drastically cut spending.
"As the era of reform and tightened federal funding unfolds, not-for-profit hospitals face an imperative to deliver higher-quality service with lower reimbursement rates per unit of service," it said in a report titled "Doing More with Less."
Moody's has a negative outlook for the sector and expects rating downgrades for nonprofit hospitals to outpace upgrades this year. Another agency, Standard & Poor's Ratings Services, has a stable outlook on the sector, but expects operating pressures to worsen over time.
At the heart of the matter lies Medicare, the health insurance program for seniors which currently serves 49 million beneficiaries.
Last month, an annual federal report on the Medicare fund found it is headed for exhaustion in 2024. Costs for the $549 billion-a-year program will likely leap from about 3.7 percent of gross domestic product in 2011 to 5.7 percent by 2035.
Moody's said some of the health reform law's changes to how Medicare pays for procedures will stress nonprofit hospitals' finances. The law, which the Supreme Court could overturn in coming months, has lowered annual increases to Medicare payment rates.
"While recent annual Medicare rate increases have still been positive, ranging from 1 to 2 percent, they are lower than historical increases of 2 to 3 percent, and lower than if healthcare reform had not been passed," the agency wrote.
Also, the law strengthens ways to recoup Medicare overpayments and will institute "value-based payments" that "reward only those hospitals that show improvement in core measures and report favorable patient satisfaction scores." It will cut off payments for some preventable hospital readmissions, as well, Moody's said.
Even if the law is upheld, there are other threats to Medicare. An agreement between Obama and Congress to bring down the U.S. debt and deficit will result in a 2 percent annual reduction in Medicare rates beginning in January, Moody's said.
"More Medicare reductions are inevitable given the intense federal budget pressure irrespective of whether the healthcare reform law is deemed unconstitutional or not," it added. "The timing and extent of these reductions are unknown at this time, thereby creating more challenges."
Commercial payers will also likely slow their rate increases and many states have cut the Medicaid health insurance program for the poor that they run with the U.S. government, eating away at money sent to hospitals, Moody's said. Meanwhile, healthcare inflation has outpaced U.S. inflation for more than a decade. SECRETS TO SUCCESS: CUT, RESTRUCTURE
Hospitals poised to survive the funding drought are seeking new areas to cut beyond where they slashed spending during the 2007-09 recession. They are also using financial models to estimate future gaps and seeking savings through scale, mostly by creating partnerships or expanding centers, Moody's said.
Many are changing physicians' contracts, tracking physician performance, and shaking up their governance, as well.
The agency said nearly all of the hospitals it rates must build reserves and many have restructured their debt portfolios.
It warned that some have held on to swaps, finance contracts leftover from before the banking crisis, to avoid paying hefty termination penalties. That leaves them exposed to "fund large swap collateral calls, which for certain organizations, exceeded $100 million at various times in the last three years," it said.