This hospital industry sector is expected to achieve lower growth rates and less revenue and are likely to reduce operating budgets for medical laboratories
Tough financial times are ahead for not-for-profit hospitals, according to the projections of multiple rating agencies. Financial analysts attribute this to an extended period of massive and disruptive change. This is not good news for hospital-based clinical laboratory managers and pathology groups.
Big Three credit-rating agencies Moody’s Investors Service (NYSE: MCO), Fitch Ratings, and Standard & Poor’s Financial Services LLC (S&P) echoed a common theme in their 2014 outlooks for not-for-profit hospitals, which represent 60% of the nation’s hospitals. Environmental pressures will suppress revenue growth, while fresh cost-cutting measures will become increasingly harder to find.
Patient Volume Is Shrinking, Revenue Growth Is Slowing
“Not-for-profit hospitals face a challenging landscape over the next 12 to 18 months as patient volumes shrink and revenue growth slows,” observed Daniel Steingart, C.F.A., Assistant Vice President at Moody’s in an announcement published on the company’s website last fall.
Revenue growth at not-for-profit hospitals will fall to roughly 3% to 3.5% in 2014, Moody’s analysts projected in their report. This compares to a growth rate of 5.2% in fiscal year 2012.
“Slowdown in revenue growth evidenced in 2013 will likely deepen in 2014, driven by the declining trend of inpatient volumes, increasing use of high-deductible health plans, the expectation for another year of Medicare sequestration cuts and lower reimbursement rate increases from both governmental and private insurers,” noted Jim LeBuhn, Fitch’s Head of the Non-Profit Health Care group. He was quoted in a press release.
Expenses grew faster than revenues for a second year in a row at not-for-profit hospitals, observed the analysts at Moody’s. Not-for-profits have struggled to cut costs in an effort to improve margins. At the same time, these hospitals recognize they must reposition themselves in order to succeed in the new value-based reimbursement environment. That means they continue to invest in information technology and to expand physician practices as a source of referrals.
Healthcare Reform Uncertainties Will Further Complicate Budgeting
Uncertainties following implementation of the Patient Protection and Affordable Care Act (ACA) will present additional challenges for not-for-profit hospitals going forward. “There are many unknown variables that make budgeting and strategic planning especially difficult over the near term,” observed Moody’s Steingart.
New health exchanges under the ACA will increase numbers of insured Americans. Expanding Medicaid rolls will augment patient volumes. However, according to the Fitch report, analysts are pessimistic that these increases will be enough to boost profits.
Here are some of the other possible complications that concern analysts at Fitch, according to the company’s press release.
- Provisions of the ACA could result in uneven growth in the various categories of insured populations.
- High deductible plans could increase providers’ risk of bad debt.
- Higher utilization may not help profitability due to shrinking inpatient volumes.
Cost Savings Are Harder to Find
Going forward, it will be harder for not-for-profit hospitals to absorb additional pressures on revenue, Standard & Poor’s (S&P) noted in its December 10 report. For one reason, cost savings often require considerable capital spending before savings are realized. “We believe that, depending on the specific market, the weaker revenue environment… will shortly outstrip providers’ ability to find and fund additional cost reductions,” the agency wrote.
Many not-for-profit hospitals have already implemented the most easily achievable cost-cutting measures, according to S&P. Now they are looking for options to push cost savings even further. Some strategies being considered include best practice definition and implementation, as well as clinical integration and productivity. However, some organizations will face roadblocks. Inadequate technology capabilities and cultural inability to achieve consensus could impede needed cost-saving initiatives.
S&P acknowledged that many hospitals and health systems will effectively manage this period of change and reform. However, they forecasted that an increasing number of organizations will be unable to implement sufficiently robust countermeasures. Even the strongest hospitals and health systems will likely only be able to hold existing margin and reserve levels, the agency reported. Weaker providers will likely face further erosion of operating margin and cash flow.
At Not-for-Profit Hospitals, Change Will Be Rapid, Continuous, Disruptive
Deloitte Consulting LLP echoed projections of difficult times ahead for many not-for-profit hospitals. “Change will be rapid, continuous, and in some cases, disruptive to established care models,” stated Mitch Morris, M.D., Vice Chairman and U.S. Health Care Provider leader at Deloitte Consulting LLP, in an interview published in The Wall Street Journal. “Instituting change of this magnitude represents a huge cultural shift, and will take years to accomplish,” he declared.
According to Fitch analysts, the financial performance of not-for-profit hospitals will depend on how quickly they can reduce costs, manage staffing expenses, and identify clinical efficiencies. The agency expects mergers and acquisitions activity will continue to be robust. Hospitals will seek out partners to help meet varying needs. These might include the need to improve economies of scale, increase market presence, or bolster service offerings.
Clinical Laboratories in Not-for-Profit Hospitals Will Have Fewer Resources
The fact that multiple financial rating agencies predict tougher financial times ahead for a large number of not-for-profit hospitals is not good news for the clinical laboratory professionals and pathologists who work in these hospitals. Among other things, it means that medical laboratory budgets will continue to shrink and lab managers will be asked to do more with fewer resources.
—by Pamela Scherer McLeod