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Children's hospitals prepare for long-term financial challenges

Sector is managing well but many providers no longer have wide margin of financial strength compared with the larger pool of acute care hospitals

U.S. not-for-profit children's hospitals are likely to remain stable in the next year or two although changes on the horizon, including those related to healthcare reform, could affect the sector's traditional niche role, according to a new report from Standard & Poor' Ratings Services.

The report, "U.S. Not-For-Profit Children’s Hospitals Median Ratios Remain Sound But Long-Term Challenges Could Affect Business Model," notes that median children's hospital ratios for fiscal 2013 stayed strong or improved from a year earlier. S&P said this reflects a stable credit profile that should be sustainable given the financial flexibility of many providers.

"We believe the sector is managing well even though many providers no longer have the wide margin of financial strength compared with the larger pool of rated acute care stand-alone hospitals," said Standard & Poor's credit analyst Suzie Desai in a statement. "Nonetheless, the financial profile is generally more robust than that of stand-alone providers."

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Standard & Poor's rates 21 stand-alone children's hospitals, all of which are independent providers that are not a part of a larger general acute care hospital or healthcare system.

Contributing to the current robustness of children's hospital profiles are some distinctive factors:

  • The ability to attract specific pediatric subspecialists and to provide high acuity services not generally available in general acute care hospitals or some academic medical centers;
  • Philanthropic and fundraising support well above and beyond what general acute care providers are able to garner;
  • Most rated facilities are often the sole provider of tertiary and quaternary children's care for a large region, and have expanded their ambulatory footprint by establishing relationships with general acute care facilities;
  • Providers have built their regional networks to "cast a wider net," so as to maintain a wide-enough catchment for high-end pediatric referrals;
  • Children's hospitals have developed additional services that cross into the adult market, including maternal-fetal health programs, and pushing the traditional age limits by serving patients with childhood conditions into their early 20s.

What hasn't changed for children's hospitals is the considerable risk pediatric providers face in relying on Medicaid funding, S&P indicates. Most children's hospitals are ultimately vulnerable given their generally high exposure to Medicaid programs as a percentage of their overall payer mix, the report notes.

The S&P report identifies four aspects of the Affordable Care Act that could ultimately challenge the financial position of children's hospitals. They are:

Revenue pressures. S&P argues that, should more pediatric commercial patients sign up for insurance through exchanges, providers could begin to see smaller payments from these new policies than from traditional commercial contracts for their services. In some markets, contract negotiations are getting tougher, the report indicates, and in states where the Medicaid programs are still evolving or where commercial insurers are more active, children's hospitals are conducting pilot programs that put some reimbursement at risk for certain quality and cost metrics. S&P concludes that, over the longer term, "these types of programs could put more pressure on overall revenues."

Cost reduction. According to the report, some children's hospitals may have higher cost structures given the sector's minimal consolidation to date, which makes achieving efficiencies more difficult and requires all providers to continue to provide comprehensive, but necessary and sometimes expensive, services. In
addition, many pediatric providers are tied to universities by serving as teaching hospitals for medical schools. These relationships tend to come with a higher cost structure, making it more difficult to implement meaningful cost reductions.

Physician integration. "As cost and quality measurements weave their way into commercial and Medicaid payment contracts, physician coordination has become even more important," the report notes. Integration efforts could reduce costs and improve quality in the long term, but S&P says the immediate investments to build networks and employ physicians can adversely affect operations, much as they do in the overall acute care sector.

Patient volumes. Children's hospitals, along with many specialty hospitals, have seen inpatient volume shifts to outpatient cases and to other general acute care providers for less-intensive ailments, while a core group of high acuity and high-cost patients remain at the children's hospitals. S&P says this trend "may result in a chasm between the stronger operators located in less-competitive or larger markets who can fill their inpatient beds with the higher acuity services and the weaker hospitals with significant competition or limited demographics who cannot do so.