CHICAGO – The not-for-profit healthcare sector is holding steady but may have peaked as persistent long-term challenges threaten to undercut gains that have bolstered margins, says S&P Global Ratings health care analyst J. Kevin Holloran.
Balance sheets and margins have hit highs and going forward it "only gets tougher," Holloran, a senior director, said during the rating agency's annual cross sector discussion in Chicago Wednesday. "We think this is the peak. This is as good as it gets…that's the message we want to give you."
That doesn't mean the rating agency is predicting any near-term shift in its stable outlook on the sector which saw 24 upgrades and 22 downgrades through August. The outlook reflects the past year's results and projections for this year. The rating agency has also said it expects stability to continue through 2017.
Balance sheets have reaped the benefits of several years of stronger results thanks to some aspects of the federal Affordable Care Act. Many states opted to expand Medicaid under ACA and more of the population is insured which overall has improved volume levels and payer mixes.
In states that expanded Medicaid, the ratio of upgrades to downgrades has been two-to-one so the impact has been "meaningful," Holleran said. Some states where leaders were opposed to the ACA have opted not to expand Medicaid there citing concerns over future federal funding. The federal government's 100% coverage of the newly covered drops to 95% next year and then to 90% in 2020.
Long-term management initiatives like physician alignment and care transformation have also begun to pay off in reducing expenses and improving revenues. "Those really started to bear fruit," he said.
But they have offered only a "temporary easing of some of the pressures that are out there," Holloran said. Clouds loom in ongoing volume, labor shortages, and salary and wage pressures at the same time that ACA benefits have already begun to level off and the impact of ongoing reforms clouds the sector's picture.
Uncertainty and risk loom after major insurers announced decisions to leave state insurance exchanges set up under federal healthcare reform and mergers and acquisitions are continuing unabated with bigger systems moving to join forces. S&P has generally viewed the merger activity as a positive as systems look to leverage their greater scale to cut administrative costs and improve their negotiating positions with insurers.
The not-for-profit sector often trails trends seen in the for-profit provider sector and on that front analyst David Peknay, a director, said admissions are already on the decline and margins have slipped.
Holleran sees merger activity as being at an "inflection point" with growing activity that breaks from historical patterns of stronger hospitals or systems acquiring weaker ones and that could draw greater regulatory attention.
"It used to be the strong picked up the weak" player, Holloran said. "I think what we are seeing now is a break from that….the strong merging with the strong."
That in turn could increase scrutiny and the industry "might see regulators get much more involved when the strong are saying they we want to merge with the strong."
Locally, the Federal Trade Commission's latest anti-trust challenge was launched against Illinois-based Advocate Health Care and NorthShore University Health System. The FTC suffered a setback earlier this year when the court rejected arguments that the merger would hurt consumers and said it could proceed. The FTC has appealed. Both systems carry double-A level ratings.
The latest example of two big systems considering a union came in the recent announcement that Catholic Health Initiatives and Dignity Health are in negotiations that could result in creation of the nation's largest nonprofit hospital chain.
CHI, based in suburban Denver, is the second-largest nonprofit health-care provider in the U.S. behind Ascension Health. San Francisco-based Dignity is ranked No. 5. CHI has about $9 billion of outstanding debt, $15.2 billion in annual revenue in 2015 and 103 hospitals in 18 states. Dignity has about $5.4 billion of outstanding debt, $12.9 billion in revenue, and 400 facilities in 22 states. In April, S&P placed a negative outlook on Dignity's A rating and downgraded CHI one notch to A-minus from A, leaving the outlook negative.
