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Grim Outlook for Non-Profit Health Care, Hospital Sector in 2015

Largest hospitals will get stronger as smaller ones get weaker, analysts predict

The outlook for non-profit health care remains dour for 2015 as hospital operating margins continue to face pressure from rising costs and weaker reimbursement.

The three major credit-rating agencies gave the health care and hospital sector a negative outlook for next year, citing anticipated downgrades, declining operating cash flows, and ongoing uncertainties surrounding the implementation of the Patient Protection and Affordable Care Act (PPACA).

“Many providers will not be able to adapt,” said Martin Arrick, an analyst with Standard & Poor’s Ratings Services.

S&P predicted more downgrades than upgrades among non-profit health care providers for a third consecutive year as operating margins are pinched by rising costs.

Moreover, Moody’s Investors Service anticipated another 12 to 18 months of weak performance, with large hospital systems faring better from economies of scale and the ability to drive revenue growth through expanded services.

“The largest hospitals are getting stronger, while the smaller hospitals get weaker,” said Moody’s senior analyst, Daniel Steingart.

Many hospitals have exhausted the low-hanging fruit for cost-cutting. At the same time, hospitals are expected to shift away from the traditional fee-for-service models, in which more patient services led to more revenue. The PPACA and purchasers of health care are now emphasizing preventative care and reduced hospital stays.

That trend might be good news for the 43 million Americans grappling with overdue medical debt, according to the U.S. Consumer Financial Protection Bureau, but not so for hospitals that historically counted on health care spending to balance operating budgets.

Fitch Ratings said more uncertainty is on the way, as Republicans with Congressional control vow to repeal or defund parts of the PPACA. That would “hamper the sector’s ability to adapt and plan,” Fitch said.

The rating agency was closely following an upcoming U.S. Supreme Court decision in the King vs. Burwell case, in which the court could effectively invalidate insurance coverage purchased through federally operated state exchanges.

“The hospital sector has navigated many challenging environments in the recent past, but the upcoming years represent a true transition as the core model of health care delivery and reimbursement is undergoing redesign,” said James LeBuhn, Fitch senior director.

Source: Reuters; December 17, 2014.

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