While nonprofit health systems are doing more than ever to run efficiently, it's getting harder for them to make money.
That's according to a new report from Fitch Ratings, which said it's maintaining a negative outlook for the sector based on its evaluation of audited 2017 data for nonprofit hospitals around the U.S.
In years past, a health system executive who saw operations slipping a bit might have a series of belt-tightening and efficiency initiatives and operations would respond, Kevin Holloran, an analyst at the credit rating's agency who produced the report told FierceHealthcare in an interview.
Now those sorts of initiatives seem to be happening constantly, he said. And the report notes key balance sheet metrics, such as cash-on-hand, are improved.
But, Holloran said: "There's a whole lot of work going on, but even all those efforts are just not coming through like they used to in the operating margins."
What's going on?
Of course, the basics like rising expenses associated with labor force and skyrocketing prescription drug costs are part of the problem. But the biggest issue has been the rough transition the shift from getting volume-based payments to value.
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"Even if you're not in a market that changes rapidly, you're getting ready for it," Holloran said. Health systems are spending resources putting in new IT systems, buying physician practices or starting health plans or at-risk plan.
"Even if you don't have a substantial amount of at-risk contracts, that's probably dragging on the margins," Holloran said. "And then the payor mix is slowly deteriorating largely across the board and most of it is coming from the baby boomers who are aging out of commercial [plans] into Medicare. That is always a net loss."
The findings echo an August report from Moody's Investors Services which showed the growth of expenses at nonprofit and public hospitals outpacing the growth of their revenue. "Revenue pressures continue to overshadow expense-saving initiatives," said Moody's Analyst Rita Sverklik in a statement. Health reform
Threats to health reform only add to the difficult mix of pressures hospitals face, Fitch said in the report.
"Fitch maintains a negative sector outlook, which reflects Fitch's belief that many of the alleviated pressures imparted from healthcare reform have only been deferred, not eliminated," the report says.
The report said analysts don't expect an outright repeal is likely but the diminishing of the ACA on the periphery is more probable.
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"We see the incremental cuts at the margins," Holloran said. He pointed to individual lawsuit challenging the ACA and the repeal of the individual mandate that was part of a tax bill passed last year. "That's going to trickle down eventually and cause some issues with the exchange products and its likely to create more uninsured and underinsured," Holloran said. "That uncertainty is absolutely out there and it's hard to operate in."
Stable outlook
Despite the negative sector outlook due to operational pressures and uncertainty in operating margins, Fitch gave a Stable Rating outlook, citing the improvements in providers' improving balance sheet strength.
The report also notes capital spending increased in fiscal 2017 for the third year in a row after hitting an eight-year low in fiscal 2014. But the type of spending is changing, he said.
About 10 years ago, two-thirds of every dollar spent in healthcare was on that classic inpatient tower, Holloran said. That number has dropped to about 35%.
Where is that money being spent? "It really went into ambulatory. So the kind of spending you're seeing now isn't that big $100 million-plus, multiyear spend on a huge bed tower which tends to occupy a lot of time and a lot of energy and a lot of focus. Now it's more multiple smaller projects on ambulatory buildings, ambulatory surgery centers, free-standing EDs and access points. More frequent projects at a lower cost that add up."
