U.S. Hospitals Face Gloomiest Economic Outlook in 20 Years

Jane Sarasohn-Kahn

First posted 9/08/11 on Health Populi

Revenues = volume x price. This is the financial reality for every organization that makes its money serving customers, whether for-profit or not-for-profit.

For the U.S. hospital sector, both volumes and prices are falling, leading to a depressed top-line. Reimbursement reductions from Medicare, Medicaid and commercial health plans are all under pressure: that’s the ‘price’ part of the equation. On the volume multiplier, the recession economy has caused patients to delay care, such as elective surgeries. Hospitals are forced to scrutinize every aspect of operations, according to Hospital Revenues in Critical Condition; Downgrades May Follow, from Moody’s Investors Service.

Moody’s points to declines in inpatient admissions, and falling outpatient indicators including ER visits, outpatient visits, and outpatient surgeries, all due to the “sluggish economy,” the agency wrote.

Exacerbating the negative bottom-line impact is the continued growth of uncompensated care: that is, health services provided to patients who leave the hospital without paying their bill.

Moody’s expects these trends to continue with a weak national economy and sustained high unemployment. While hospitals did a good job managing debt and cash positions and investments improved in 2010, the 2011 stock market declines will temper that short-term positive news.

Health Populi’s Hot Points: Top-line revenue for hospitals will continue to be challenged by Medicare, Medicaid, and commercial payers, all of which will ratchet down payments in a tightly managed reimbursement environment. New payment regimes such as bundle payments will challenge hospital CFOs who have been working hard to manage thin margins, worsened by uncompensated care until the Affordable Care Act kicks in coverage in 2014.

Hospitals in 14 states had revenue growth below 4% between FY2009-2010, including hard-hit post-industrial Michigan, Indiana (with a negative growth rate), Pennsylvania, and West Virginia; but surprisingly, hospitals in the states of Washington, Arizona, and Missouri also fell below the 4% revenue growth rate that Moody’s looked at.

Moody’s expects that Medicare cuts will lead to hospital credit downgrades, which will be coupled with cuts in reimbursement to physicians — whose practices a growing number of hospitals are acquiring as they look to build accountable care organizations and primary care capacity. Because Medicare is the average hospital’s largest single payor, these cuts will have significant impacts on hospitals’ finance.

Medicaid, too, is fiscally challenged as State Governors wrestle with balancing budgets. And commercial plans, which employers use to cover insured workers, get a negative outlook from Moody’s as companies continue to shed workers and, thus, the population of insureds.

“Economy drives volumes down and uncompensated care up,” Moody’s report observes, illustrated in the chart. The C-suite in the hospital has its work cut out for it in the next few years, managing out of the old world of fee-for-service; into the new world of bundled payments, value-based and accountable care; and navigating the changing landscape of consumers’ growing role in health care decision making and paying.

Jane Sarasohn-Kahn is a health economist writing at Health Populi.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s