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Nonprofit healthcare margins to buckle under value-based pay in 2016 and beyond, Fitch says

Clinician hiring tied to population health programs also threatens to drive up expenses, the credit rating agency says.

Despite their steady financial performance in 2015, nonprofit healthcare organizations could  see a rough few years as value-based reimbursement takes a greater hold over the industry, according to a new sector report by Fitch Ratings released on Wednesday.

Operating margins for nonprofit healthcare businesses climbed from 3 percent to 3.5 percent between 2014 and 2015. That was largely driven by higher numbers of insured, focus on revenue cycle improvements and collections, strong cash flow and steady amounts of cash on hand, Fitch said.

[Also: Hospital mergers swell in 2016 with nonprofits leading the surge, analysis shows]

But the credit rating agency said 2016 expenses could be higher driven by the need for systems to hire more clinicians to align with population health programs.

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The largest concern, however, will be how health systems manage the increased risk tied to value-based payment. The Centers for Medicare and Medicaid Services has pledged to tied 50 percent of its payments to risk by 2018, and that number will only rise from there.

[Also: Tracking 2016 mergers and acquisitions]

"Over the next 36 months we believe the movement to risk-based payer contracts from managed care contracting is likely to gain momentum, mainly because their most common proponents, larger and more integrated health systems, have emerged in several major metropolitan areas," Fitch said in the report. "This transition will likely heighten existing pressure on operating margins. The likelihood of margin compression will be greater for hospitals with less experience in managing risk and those with smaller revenues bases and mostly fixed expenses."

While larger nonprofit systems may have an easier due to their geographic scale and the number of services they offer, the coming years will be more difficult for smaller nonprofit systems and standalone facilities. As a result, Fitch expects to see more mergers and acquisitions among these facilities.

Twitter: @HenryPowderly
Contact the author: henry.powderly@himssmedia.com