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Moody’s predicts more bad news for nonprofit hospitals

The slim increase in Medicare payments, combined with the sequester’s Medicare payment cuts, puts more pressure on hospitals to maintain margins.

By Sue Ter Maat — Posted Sept. 2, 2013

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The decision by the Centers for Medicare & Medicaid Services to increase the Medicare rate by only 0.7% in 2014 is negative for nonprofit hospitals, according to a Moody’s Investors Services report released in August.

Although it’s an increase in payment, it’s not enough to cover the 2.8% hike in hospital costs expected by CMS, according to the report. This is of concern to nonprofits, because Medicare is their single-largest payer. Forty-four percent of gross revenues comes from Medicare payments for these hospitals.

Moody’s announcement is more bad news this year, after nonprofit hospitals received a negative outlook from the bond rating agency in January. Then in April, the federal budget sequestration process further pressured hospitals, the agency said.

“When rate increases are slim, it contributes to the overall revenue pressure, which is a driver to our negative outlook on the not-for-profit hospital sector,” said Lisa Goldstein, associate managing director at Moody’s.

For-profit hospitals, which received a stable outlook for Moody’s this year, will not be as affected by the slim increase, said Dean Diaz, senior vice president at Moody’s.

“The traditional Medicare plan is about 36% of revenues for for-profit hospitals on average,” he said. However, for-profits also are feeling the same pressure to maintain margins. Some recent financial reports showed earnings that were less than expected.

Tough for bottom lines

Moody’s said in April that the 2% reduction in annual Medicare payment rates mandated by sequestration probably will cause hospitals to take more drastic measures to offset falling revenues. That likely translated into some nonprofit hospitals decreasing expenses further, increasing efficiencies and re-evaluating patient delivery care models.

The agency identified 15 hospitals that were more exposed due to Medicare cuts. Six of those hospitals were in Florida, and many of the remaining hospitals are in states with large retirement communities. In addition, 12 of the 15 hospitals come in below Moody’s median hospital rating.

At the time, Moody’s said it was not changing its individual credit ratings. That was because 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.

But it was noted that the Medicare cuts would be especially difficult for those who didn’t take the sequester into account when budgeting. The Bureau of Labor Statistics reported that hospitals were shedding jobs in July, after years of job growth that was faster than the economy as a whole. Analysts said cuts affect nonclinical personnel, and that hospitals’ economic issues will not stop them from hiring physicians or acquiring practices. In fact, they said it might cause plans to accelerate, so hospitals can get more outpatient revenue and perhaps a more reliable patient stream to their inpatient facilities.

The April sequester report said federal health care cuts are only part of the picture of why revenue growth for nonprofit hospitals has dropped. It cited lower patient volumes and a struggling economy as additional factors. The greatest challenge for nonprofits continued to be the reduction in payments from the government and business sectors, the report said. The sequester report came after a January study by Moody’s that gave nonprofit hospitals a negative outlook for the sixth year in a row.

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