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Moody's revises nonprofit and public health outlook to negative as hospitals face rising operating pressure

Hospitals have been unable to translate volume growth into stronger revenue due to lower reimbursement rate increases and higher expenses.

Jeff Lagasse, Associate Editor

Moody's Investors Service has revised nonprofit and public healthcare outlook for 2018 from stable to negative based on the expectation that operating cash flow will contract by 2-4 percent over the next 12 to 18 months.

"Operating cash flow declined at a more rapid pace than expected in 2017, and we expect continued contraction of 2-4 percent through 2018," said Moody's Vice President Eva Bogaty in a statement. "The cash flow spike from insurance expansion under the Affordable Care Act in 2014 and 2015 has largely worn off, but cash flow has not stabilized as expected because of a low revenue and high expense growth environment."

The ACA's mandated coverage and Medicaid expansion heralded a drop in unpaid hospital bills from 2014 to 2016, but bad debt rebounded in 2017 and will continue to grow at a rate of 6 to 7 percent in 2018, Bogaty added. 

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[Also: Some doctors are now scaling back on low-value care to save in costs]

Moody's said hospital revenue growth is slowing and is expected to remain slightly above medical inflation, which declined to a low of 1.6 percent in September 2017. The inability of hospitals to translate volume growth into stronger revenue growth is due to the lower reimbursement rate increases across all insurance providers, and higher expense growth.

Plus, rising exposure to government payers will dampen revenue growth for the foreseeable future due to a rapidly aging population and low reimbursement rates. Government payers, including Medicare and Medicaid, represented 60 percent of gross patient revenue in 2017.

Key drivers of expense growth include rising labor costs, driven by an acute nursing shortage and ongoing physician and medical specialist hiring. Technology costs are also rising as systems are upgraded and IT staff is needed for training and maintenance. While the ACA's arrival heralded a drop in "bad debt," or unpaid hospital bills, from 2014-16, bad debt rebounded in 2017 and will continue to grow at a rate of 6-7 percent in 2018.

"Rising copays and use of high deductible plans will increase bad debt for both expansion and non-expansion states," said Bogarty.

Recent federal tax proposals, however, will add to rising costs for hospitals, Moody's said, while uncertainty regarding federal healthcare policy will have a marginal fiscal impact on NFP hospitals, according to Moody's. Ambiguity surrounding the Affordable Care Act affects the planning and modeling of long-term strategies, while recent federal tax proposals will add to rising costs for hospitals.

The outlook could be revised to stable if operating cash flow resumes growth of 0-4 percent, said Moody's. A change to positive could result from expectations of accelerated operating cash flow growth of more than 4 percent after inflation.

Healthcare Finance Senior Editor Susan Morse contributed to this report. 

Twitter: @JELagasse
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