Hospitals: A health industry weak spot

at 02:45 PM ET, 08/11/2011

The health industry tends to be relatively resilient in tough economic times for a simple reason: People don’t stop getting sick. It has led the way on job growth for the past year now, adding 117,000 new jobs since July 2010. Insurance companies have, over the past few weeks, reported robust earnings that beat analysts’ expectations.

But there’s at least one place in the industry where that has not been true: not-for-profit hospitals, which make up just under two-thirds of non-government owned hospitals nationwide. A new report from Moody’s this week says the industry might soon see a downgrade as hospital revenues have tumbled to their lowest point in two decades.

S&P, in a Wednesday statement, said it will not downgrade the sector, but it remains concerned about the outlook, noting that “the adequacy of future reimbursement from government sources is a growing risk for hospitals and health systems.”

Unlike other parts of the health sector, not-for-profit hospital revenues have largely tracked with the economy, falling by nearly half from 7 percent in 2007 to 4 percent last year. The question is why.

“What we found in 2010 is volumes are down and rates are down,” says Lisa Goldstein, a senior vice president at Moody’s and author of the new report.  “All the commercial payers are putting more pressure on the hospitals. It’s that confluence of volumes and rates that’s really driving [down] revenues.”

Hospitals face different pressures than a lot of other parts of the health sector, namely because they take the brunt of many of the other cuts made by other parts of the health delivery system. They’ve seen payments from private insurers decrease in an attempt to keep premiums down. States have slashed Medicaid reimbursement rates. Elective procedures — a part of the health care world that other providers, like nursing homes and hospice facilities, don’t deal with as much — have dropped significantly.

After all, although people don’t stop getting sick, they do sometimes put off care. When volume goes down for the insurance industry, that’s good for business: They have fewer claims to pay out. But it’s the opposite story in the hospital industry, where fewer elective procedures mean fewer items to bill.

The future, too, looks ominous: Hospitals are regularly named as one of the most likely sectors for which the supercommittee will cut Medicare reimbursement rates.

“We see Medicare cuts as inevitable,” says Goldstein. “We’re waiting to see what the supercommittee does, and we fully expect Medicare to be in the crosshairs. It’s not if, but when.”

How this plays out for consumers is a bit of a mixed bag. We might have fewer hospitals, as those facing the most serve financial challenges merge or close. That could be a good thing: The hospitals most likely to shutter are those that deliver less efficient care.

Hospitals are paying closer attention to providing more efficient, coordinated care, says says Matthew Eirich, executive director of the Health Care Advisory Board, who specializes in research on health-care revenue growth. They’re particularly focused on cutting readmissions, when patients come back to a hospital shortly after discharge because of a complication. Those are costly for hospitals — and not good for patients, either.

“Since the start of the recession, and passage of the Affordable Care Act, the mantra of hospitals has been: look at operation, look at labor, and become more productive and efficient,” says Eirich. “They’re looking at ways to become more efficient and manage their cost, an issue that has been more muted in the past.”

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