May 9 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
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
"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.