About 18% of U.S. hospitals are at risk of closure or performing weakly, according to a Morgan Stanley analysis of more than 6,000 facilities. The highest concentrations of "at-risk" facilities are in Texas, Oklahoma, Louisiana, Kansas, Tennessee and Pennsylvania.
Morgan Stanley determined 8% (about 450 hospitals) as at risk of potential shuttering, versus the 2.5% that closed their doors over the past five years, and said an additional 10% (600 hospitals) are "weak." The rest of the facilities studied were deemed "healthy."
Key risk factors were low capital expenditures, higher hospital capacity in a 10-mile radius, a lower operating efficiency index (indicative of a hospital's ability to generate profits from government reimbursement) and for-profit versus nonprofit status, as (all else being equal) for-profit facilities have a higher risk of closure.
Though the outlook has not been overwhelmingly positive for hospitals in recent months, the report could be read as a fresh nail in the coffin of larger and more traditionally-minded systems. Increased M&A activity in recent years may not be helping systems weather the storm, in light of this new data.
Following $100 billion in consolidation deals over the past five years among hospital systems, recent months have been a rude awakening for highly-levered companies looking to slough off their worst-performing facilities.
After the passage of the Affordable Care Act began in 2010, eager hospitals across the board reported improved revenue and consolidation as the legislation brought in a new host of patients to hoist their bottom lines. But that early profitability has taken a hit recently as debt-laden systems seek to divest to pare down debt in a market increasingly devoid of buyers for single-facility hospitals, according to the report.
In June, Fitch Ratings reported that large health systems Community Health Systems, HCA, Tenet and Universal Health Services had an aggregate $178 billion in debt. The 20-state CHS was especially beleaguered, bringing in financial advisors earlier this year to restructure long-term debt ($13.8 billion at the closing of 2017) that stemmed primarily from its flawed acquisition of Health Management Associates in 2014.
The Franklin, Tennessee-based operator doubled down on its divestment strategy in the first half of 2018. It has sold seven hospitals so far this year with definite plans to sell five more, and it divested 30 facilities last year.
Yet the future of CHS' portfolio-pruning strategy is unclear, as the Morgan Stanley report noted the 119-hospital system had a high concentration of weak and at risk facilities relative to its peers.
The analysis seemed a tad more positive for HCA and UHS, which are "better positioned" with stronger balance sheets yet continue to be hammered by the same industry headwinds as smaller, less stable systems.
The Morgan Stanley analysts, led by Vikram Malhotra, outlined a host of factors that are putting this sustained pressure on hospitals' profit margins.
Most notable is new competition from alternative sites of care as well as patients' cost-saving rationale to go there, with the mounting popularity of high-deductible health plans in a market of skyrocketing prices. The exodus is likely to continue as the government gets on board. Last year, CMS announced Medicare would reimburse for hip and knee replacement surgeries in an outpatient setting, spurring an uproar of protest from hospital administrators, and continued the controversy in July of this year by proposing site neutral payments.
Additionally, with the hot trend of payer-provider vertical integration (CVS-Aetna, Cigna-Express Scripts, UnitedHealth-Optum, Humana-Kindred, etc.) traditional hospital systems are seeing themselves increasingly marginalized in a sector where they used to act as oligarchs.
Patient composition is similarly shifting, as rising rates of uninsured hospital attendees and an increasing reliance on Medicare and Medicaid as the aging of the American population contributes to declining revenue per patient and lower margins.
Amid this upheaval, Morgan Stanley's work stresses the previously-hypothesized weakness of providers, which "suggests the narrative on hospitals is about to change."