In January, Moody’s upgraded its 2020 outlook for the NFP Healthcare Sector from Negative to Stable.
Despite the improved outlook for the not-for-profit (NFP) healthcare sector, Stroudwater believes that the easing is likely to be short-term, due in large part to non-recurring factors. Meanwhile, industry fundamentals and the negative trends buffeting the sector will likely prove to be enduring and recurring. For this reason, Stroudwater encourages its clients to view this respite as temporary and they should plan and act accordingly.
To be clear, Moody’s outlook is for 2020 and not meant to be a long-term projection for NFP hospitals. However, Moody’s commentary is quite insightful and revealing about long-term challenges and risks confronting NFP hospitals and health systems.
Per Moody’s, NFP hospitals’ operating cash flow is expected to improve by between 2% and 3% in 2020 due in part to the highest Medicare reimbursement rate increases in many years, an expected delay in payment cuts to Disproportionate Share Hospitals until late 2020 and increases in commercial health plan rates in the low single digits and tighter expense controls.
Moody’s also acknowledged a set of important “headwinds” that may impact future performance of NFP health systems. From Stroudwater’s perspective, the challenge in many of these headwinds are structural and recurring. While there may be some short-term risk mitigating factors in 2020, the longer-term trend is populated by challenging fiscal environments, rising costs, shortages of key staff, an uncertain regulatory environment and multiple sources of disruption and emerging competition. Clearly it is not a time for hospital and health system leaders to be complacent. Rather, accurately defining and prioritizing your opportunities and sources of strategic and operating risk can make a profound difference in the future trajectory of your organization.
The list below includes Moody’s summary of key challenges with some additional commentary from Stroudwater:
- Profitability on Medicare volume will remain a challenge for many providers even with larger rate increases approved in 2020 (see 2019 MEDPAC analysis of profitability here.)
- Federal and state budget constraints that will constrain future payment increases from CMS
- Increases in labor costs and continuing provider shortages
- Greater consumerism and pricing transparency, including a new requirement to post rates negotiated with insurers
- Slowing increases in patient volumes
- Legal challenges to the ACA (and the coverage it authorized) including Medicaid block grants
- Efforts to rein in drug prices, leading to a reduction in income for 340B eligible hospitals
- Shifts in case mix from commercial insurance to Medicare
- Increases in bad debt and the numbers of underinsured due to price increases and the continuing proliferation of high deductible health plans
- An uptick in the number of uninsured from 10.6% in 2016 to 13.7% by the end of 2018, likely due to the elimination of the ACA’s individual mandate
- Negative revenue impacts from the continuing shift to outpatient settings and the emergence of new competitors
- An increasing need to demonstrate value to get higher commercial rates and secure participation in narrow networks
Hospital and health systems leaders need to plan for a future beyond 2020 and that future looks to be challenging. Defining and quantifying sources of strategic risk and key operating, financial, market and value (cost and quality) trends is an essential first step for laying the groundwork for sound strategy and operational plans. Find out more about how your organization can take the necessary steps to position itself for the challenges that loom by requesting a strategic and operational risk analysis or a strategic risk assessment.