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Nonprofit hospitals feel pinch of sequester

A Medicare payment cut will force hospital executives to offset losses, especially in states with large retirement communities, according to a report.

By Sue Ter Maat — Posted April 23, 2013

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Moody’s Investors Service in April delivered more bad news to nonprofit hospitals in a report that paints an even more dire picture of their finances than the bond rating agency had previously stated.

The 2% reduction in annual Medicare payment rates mandated by sequestration, which began April 1, will prompt nonprofit hospitals to take more drastic measures to offset falling revenues, according to Moody’s.

That means nonprofit hospitals must decrease expenses further, increase efficiencies and re-evaluate patient delivery care models. It will accelerate the trend of hospitals placing patients in lower-cost settings whenever possible, said Sarah A. Vennekotter, Moody’s assistant vice president, analyst and report author.

Where hospitals are most at risk

Moody’s identified 15 hospitals that are more exposed due to Medicare cuts, with six in Florida. Many of the remaining hospitals are in states with large retirement communities. In addition, 12 of the 15 hospitals already are rated below Moody’s median hospital rating.

Despite the bleaker outlook for these hospitals, Moody’s is not changing its individual credit ratings right now. Many of the hospitals have faced similar reductions and made midyear expense cuts that offset declining revenues. Some have maintained healthy cash reserves that may help offset the sequester cuts.

It will be especially difficult for those who didn’t take the sequester into account when budgeting, Vennekotter said.

The sequester report comes after a January study by Moody’s that gave nonprofit hospitals a negative outlook for the sixth year in a row. The bond rating agency said it could have been worse had hospital executives not acted to offset falling revenues. Increased hospital and physician alignments helped facilities improve their bottom lines.

Federal health care cuts are only part of the picture of why revenue growth for nonprofit hospitals has dropped. The report cited lower patient volumes and a struggling economy as additional factors, but said the greatest challenge for nonprofits is the reduction in payments from the government and business sectors.

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