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Moody's upgrades 2020 outlook for non-profit healthcare sector to stable

Non-profit hospitals on track for higher operating cash flow and continuing M&A activity, though demographic and policy risks remain

Despite ongoing demographic and social challenges, as well as domestic policy-related risks, the Moody's outlook for the non-profit and public healthcare sector is on an upward trajectory.

In a report released last week, Moody's Investors Service revised its 2020 outlook for the U.S. not-for-profit and public healthcare sector from negative to stable, reflecting stronger revenue growth, higher operating cash flow, and continuing merger and acquisition activity.

WHY THIS MATTERS

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The Moody's report states that operating cash flow for non-profit hospitals and healthcare facilities will grow 2 to 3 percent in 2020, driven by the highest Medicare reimbursement rate increases in many years, a slight increase in commercial rates, and tighter expense controls, as well as, to a lesser extent, patient volume increases. The report also predicts that "health systems will also avoid difficulty with another likely postponement of reductions in Medicaid disproportionate share (DSH) payments until at least well into 2020."

Meanwhile, Moody's notes that continued M&A activity "shows no signs of a slowdown," as hospitals attempt to gain negotiating leverage with commercial insurers that also keep growing in size and power. Consolidation in this sector allows hospitals and health systems (especially small and rural ones) "to fend off growing competition, adjust to changing consumer preferences and cost structures, and diversify revenue streams," according to the Moody's analysis.

Still, despite these positive trends, hospitals' financial performance is vulnerable to developments at the federal level. From new federal rules around price transparency, to court decisions that could dismantle all or part of the Affordable Care Act, to potential postponement of reductions in Medicaid DSH compensation and efforts to rein in drug prices, health systems face a range of legislative, judicial, and regulatory risks.

Furthermore, Moody's warns that an aging population means more patients using Medicare, which generally reimburses at a lower level than private insurance plans. Additionally, higher commercial insurance costs may lead to more un- or underinsured individuals -- another risk for hospitals.

THE LARGER TREND

Last year, Moody's acknowledged glimmers of stability, but kept its 2019 outlook negative based on flat cash flows, a rise in bad patient debt, and labor issues such as higher wages and nursing shortages.

ON THE RECORD

Moody's offered insight on what would make it change its outlook from stable to positive: "Operating cash flow growth above 4% after inflation could lead to a change in the outlook to positive," the report states. "Clearer resolution of, and/or beneficial changes in, federal policy would help support a stable or positive outlook."

However, the Investor Service said, flat cash flow "or an adverse legislative, regulatory or judicial action eliminating insurance coverage for a large slice of the population could change the outlook to negative."

Deirdre Fulton is communications professional and freelancer based in Maine.