Long-term outlook for not-for-profit hospitals is full of question marks

Analysts from the U.S. not-for-profit healthcare group at Standard & Poor's Ratings Services in New York recently held a teleconference to discuss their firm's new report, "Health Care Reform Could Increase Credit Risk for U.S. Not-for-Profit Providers," and shared some interesting insights about the current state of the not-for-profit hospital market in the United States--and where it is headed as health reforms unfold.

"In the near term, our outlook for the sector remains stable right now," says Liz Sweeney, director. As of May 13, Standard & Poor's had issued 11 upgrades vs. 13 downgrades. "And in most months, we also affirm 50 to 60 hospital and health system ratings. So there is also a lot of stability reflected there."

And not-for-profits could actually thrive for awhile after the woes of 2008 and 2009. "For many organizations, in the near term we are going to see some real strength in operations, perhaps accompanied by rebuilding of balance sheets," says Martin Arrick, managing director and senior analytical leader. "Many organizations are very active right now in cutting costs, and to the extent that you get out in front of the reforms that could lower revenue, reduce admissions and cut reimbursement, your bottom line is going to really benefit."

However, over the next four to six years, the Patient Protection and Affordable Care Act (PPACA) poses some increased credit risk for not-for-profit providers, stresses Sweeney. "Ultimately there will be winners and losers, but it is hard to say up-front who those winners and losers will be." How insurance reforms and delivery system reforms play out will drive who wins and who loses. Specifically on the insurance side, each hospital will have an "individual calculation" that determines whether insurance reform benefits will be enough to offset payment reductions, she points out. That calculation will "revolve around how many newly insured people they will get; how much does that reduce their uncompensated care load; what will be the nature of the newly insured: will they be Medicaid, or will they have commercial insurance; will revenues from new patients be enough to offset reduced Medicare revenue and reduced disproportionate-share revenue, and will the primary care doctors of these newly insured do a great job keeping them out of the hospital?"

For the losers, the potential for heavy consolidation is "a fair concern," says Arrick. "There are reasons to think that the level of volume may decline in certain markets. If the volume declines are true, if other people are taking market share, we may be in a situation where we have more providers than we need in any given market. So that is a risk that we see."

Many of the reforms included in the PPACA transition healthcare away from fee-for-service payment models, says Arrick. "It does move where the risk lies, and it does begin to move the system away from the traditional ‘the more volume you do, the more revenue you're going to get.'"

What steps are you taking to prepare for the new risk environment under health reform so that you can be a winner? - Caralyn