The financial health of not-for-profit hospitals faces a negative outlook over the next few years as providers face the challenge of adapting and keeping pace with a fast changing healthcare market. The effect of these threats will be felt by neurosurgeons who practice in these hospitals.
Declining Credit Quality
Not-for-profit hospital credit quality continued to slide in 1999 after deteriorating sharply during 1998, according to a recent publication entitled 2000 Not-For-Profit Healthcare Sector, which is published by Moody’s Investors Services. During 2000 it is anticipated that the not-for-profit sector will continue its credit decline.
The rapidly shifting healthcare environment, characterized by increased competition, revenue pressure caused by managed care and government payers, and the changing strategic responses to this volatile landscape, is cited as the reason for the present financial difficulties in which many hospitals find themselves. Moody’s states that hospital earnings will remain suppressed over the near term and foresees an increasing number of bankruptcy filings as less competitive, cash-strapped hospitals struggle with excess capacity and lower levels of reimbursement.
Massachusetts hospitals, for example, reported that operating margins were in the red for the 14th straight quarter, according to results of the latest financial performance survey by the Massachusetts Hospital Association. The survey of 61 acute-care hospitals from the second quarter of FY 2000 shows that the average operating margin was a negative 2.6 percent. Over two-thirds of the hospitals in the state reported operating deficits. There was little change from the FY 1999 year-end average operating margin of negative 2.8 percent. Margins have been negative since 1997. Many other hospitals throughout the US have similar reports.
Moody’s reports that during 1999 downgrades of bond ratings for hospitals exceeded upgrades at a rate of 5 to 1. Specifically, there were 64 rating downgrades affecting over $13.4 billion of debt versus only 14 upgrades affecting $1.7 billion of debt.
The debt downgrades have a direct impact on hospital bottom lines since they raise the cost of borrowed money. Moody’s also states that there are more than double the number of negative rating outlooks (95) than positive outlooks (45) in their current portfolio.
Strategic Failure
Industry observers have noted that one reason for this negative outlook is that hospital leaders have experienced difficulty when making the transition from strategic planning to execution in their development toward larger, integrated delivery systems.
These difficulties can be broadly categorized within the following four areas:
- Failure to achieve merger and acquisition benefits;
- Continued losses from employed physician group practices;
- Ineffective management of HMO product lines; and,
- Trouble managing capitation contracts.
Problems in any of these areas have the potential to cause significant financial dislocation for neurosurgeons affiliated with affected institutions.
One key factor behind the recent credit deterioration is the inability of management to reduce costs shortly after a merger and the lack of past experience in assessing the complexity of the steps necessary to integrate the constituents and business components of the separate organizations.
Post-merger outcomes have varied, ranging from the highly publicized “break ups” of UCSF/Stanford Healthcare, Penn State-Geisinger Health System and Optima Health to implementation delays that have hampered expense reduction efforts and earnings expectations. Moreover, over the past several years, hospitals overpaid to acquire physician groups and invested significantly in their own insurance products and continue to subsidize many of these money losing operations.
On the physician front, hospitals are reducing their physician losses either thrrough renegotiating compensation contracts, consolidating physician office sites or, at the extreme, capitalizing and spinning off physicians into private practice. Moody’s believes the hospital sector has yet to demonstrate a track record that sufficiently offsets concerns over the ability to implement and execute strategic plans during this period of market turbulence.
Hospital management teams have begun to analyze strategic growth strategies against actual benefits and have come to realize that financial objectives have fallen far short of expectations. Only now is management beginning to terminate costly strategies that are proving detrimental to the financial integrity of the entire health care system.
Some Relief
Any financial relief afforded to the hospital sector would be positive. For example, recent changes in the Balanced Budget Act of 1997 (BBA) will either reverse or delay payment cuts stipulated under the BBA. It is believed that the nation’s teaching hospitals will receive a larger share of the benefit due largely to the fact that they were disproportionately impacted by the original legislation. Despite this relief Moody’s believes that the ongoing effects of the BBA will still pose challenges for the industry since Medicare revenues are expected to be less than the increases in cost to provide patient care.
A recently improving pricing environment could contribute to some prospective credit stability for some financially stronger providers benefiting from favorable market positions. However, the premium increases will probably not be shared equally with all providers and any amount that is passed on will likely fall below the increases received by the health plans.
Neurosurgeons Should be Cautious
Neurosurgeons should anticipate that the credit quality of the hospital industry will continue to deteriorate over the near term. Several recent developments could result in some credit stabilization as hospitals dismantle past merger and integration initiatives and focus on issues of cost control. However, any neurosurgeons who are affiliated with a not-for-profit hospital should keep abreast of what is occurring in their local markets in anticipation of how these changes will affect their future.
John A. Kusske is Vice President of the AANS Board of Directors and former Chair of the AANS Managed Care Advisory Committee.