For the sixth straight year, Moody's Investors Service issued a negative outlook for the nonprofit hospital sector.
Moody's analysts said nonprofit hospitals and health systems will be stuck in a challenging financial situation over the next 12 to 18 months for a variety of reasons. Most notably, Moody's expects hospitals will post weak revenue growth. In 2012, hospital revenue grew 5.2 percent, but revenue growth expectations for fiscal year 2014 are only projected to be between 3 percent and 3.5 percent.
The slowdown in revenue growth is due to several factors, Moody's said. These include lower Medicare payments (a net reduction of 1.3 percent after factoring in the 0.7 percent annual increase from CMS and 2 percent decrease due to sequestration), falling disproportionate share hospital payments that began Oct. 1 under the Patient Protection and Affordable Care Act, volumes shifting from inpatient to outpatient and severely diminished commercial payer rate increases.
Slimming down on labor costs, which represented a median 53 percent of hospital expenses in 2012, cannot be the only solution to the problem, Moody's said. "Hospitals, by nature, are highly labor-intensive enterprises and have fewer options for reducing labor costs than other industries because much of the work cannot be outsourced or mechanized," according to the report.
Aside from the continual slowdown in revenue growth, Moody's said the negative outlook also stems from heavy health IT investments that chip away at margins, changing reimbursement models and "unique challenges" like health insurance marketplaces that are associated with the PPACA.
"There are many unknown variables that make budgeting and strategic planning especially difficult over the near term, including how many people will gain insurance coverage through the public exchanges or with what frequency they will access healthcare services," said Daniel Steingart, Moody's assistant vice president and analyst and author of the report.
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