(Reuters) - Small and stand-alone nonprofit hospitals are facing mounting pressure from weak operating margins and lower patient volumes, with more signals of stress on the way, according a report released Wednesday from Standard & Poor’s Rating Services.
The rating agency warned the healthcare sector was at “a tipping point where negative forces have started to outweigh many providers’ ability to implement sufficient countermeasures.” Beginning in 2013 and continuing into this year, credit downgrades outpaced upgrades at an accelerating rate.
In particular, stand-alone providers are under greater pressure from physician departures, rising bad debt, and higher employee benefit costs.
“Hospitals have done a pretty good job cutting costs to deal with declining revenues,” said Martin Arrick, managing director at S&P. “But in the last year with the additional pressure of volume declines, it’s been the straw that is breaking the camel’s back.”
To shoulder the challenges, smaller providers have increasingly sought out mergers with larger health systems in order to “seek scale and efficiencies to offset increasing operating pressures,” S&P reported.
Larger health care organizations can better leverage their scale with vendors and insurers, eliminate duplicate services, absorb major IT project costs, as well as attract top management and physicians.
Stand-alone hospitals are generally more vulnerable to competition in their local markets, regional economic swings and demographic shifts. These hospitals are also more likely to be entirely dependent on a small group of doctors, who can suddenly leave or retire.
For these reasons, Arrick said, stand-alone hospitals have to offer a stronger profile to receive the same rating as a larger hospital system.
The uptick in consolidations within the industry has skewed credit ratings more positively as weaker-rated small providers joined with stronger-rated larger providers. Typically, the merged entity assumes the better credit profile, Arrick said.
Prior to consolidation, the smaller hospital often suffered from a declining financial profile. “If these rating changes are filtered out of the analysis, the ratio of downgrades to upgrades is even wider,” the report noted.
Editing by Ken Wills