- Nonprofit hospitals still face financial headwinds, but the worst may be over and organizations may start to gain ground as the year proceeds, according to the latest report from Fitch Ratings.
- The sector remains negative for the third straight year, with profitability likely to experience some additional decline, but nowhere as steep as in the previous two years, the credit rating agency says.
- Among the challenges buffeting nonprofits are the emergence of nontraditional competitors like Amazon and a shrinking payer mix as more patients age into Medicare, reducing the potential to boost revenue with favorable commercial insurer contracts.
Hospitals that figure out how to absorb Medicare reimbursements could fare well due to the more frequent and intensive utilization of older patients, Kevin Holloran, senior director of Fitch Ratings, said in a statement.
"With an estimated 10,000 people set to turn 65 years old every day over the next decade, the spread between the profit generating commercial business and break-even to unprofitable government payors will continue to shrink," he added.
The report offers a hint of good news for nonprofit hospitals and health systems following a series of less rosy forecasts. A Fitch report late last year showed a mixed bag in the 2018 third quarter, with 11 security ratings upgrades and 11 downgrades. Among those facing downgrades were Dignity Health and MedStar Health, both of which slipped from A to A-.
A separate Fitch report warned of continued decline in acute care operating profitability at nonprofits.
Nonprofit hospitals face the same pressures as for-profit hospitals, with shrinking volumes, smaller federal reimbursements and rising costs. Community nonprofits in states with Medicaid expansion have also seen an increase in Medicaid patients and drop in privately insured, meaning lower payments for care.
Meanwhile, some hospitals are bucking the trend and reporting healthy volume and revenue growth. Cleveland Clinic's 2018 operating revenues grew 6.2% to $8.9 billion, buoyed by an all-time high of 2 million patients.
During the year, the system also added a hospital, about 30 outpatient facilities and more than 100 inpatient beds. Cleveland Clinic CEO Tom Mihaljevic projected the system will double the number of patients it serves over the next five years.
As Fitch notes, though, nontraditional competitive entrants are vying to disrupt healthcare delivery and lure patients away from traditional settings with high-margin, low-acuity medical services to primary care clinics and other innovative services.
These competitors will be felt most keenly at the front end of the healthcare process, disrupting traditional provider-patients relationships. Fending off such threats will require significant additional investment from providers — "an attempt to 'out-Amazon Amazon,'" according to the report — or at the least some effort to partner with the new entrant.
Regardless, these nontraditional competitors drive hospitals to focus on steering patients into their care delivery system, rather than "leakage" outside the system, according to the report.
Fitch also sees positive trends in hospital management. Having endured hard times, the sector is applying lessons learned to increase operational efficiencies and reduce costs, which should help when future reimbursement cuts are made.
Still, other challenges remain. Nonprofits can expect continued scrutiny from Sen. Chuck Grassley, chairman of the Senate Finance Committee, on community benefits and tax-exempt status. Last month, the Iowa Republican asked the IRS to look into whether nonprofit hospitals are fulfilling their charitable obligations and asked additional questions about the agency's oversight of those hospitals.
The request followed earlier attempts by Grassley to ascertain whether hospitals can show they meet the criteria for tax-exempt status, including a requirement in the Affordable Care Act that nonprofits assess the health needs of their communities every three years and offer financial assistance to patients who need help paying medical bills.