CHICAGO — Moody's Investors Service said Tuesday it is maintaining its negative outlook on the non-profit health care sector for 2015, warning that key economic and financial conditions in the already challenged sector are expected to remain weak.
Operating margins, cash flow growth, and revenue growth are all expected to remain low in 2015, according to Moody's. The impact of the new federal health care law will vary by state as implementation continues to be uneven, analysts said.
Operating cash-flow growth in the sector reached a high of 7% in 2009 and has fallen every year since, Moody's said in the report, "Cash Flow Settling Into Low Level of Growth Amid Negative Outlook."
Moody's expects the operating cash flows of a majority of hospitals to decline year over year, but for cash flow for the industry in aggregate to grow slightly.
"This forecast reflects weak revenue growth stemming from a variety of reimbursement pressures and margin contraction related to investments hospitals are making to comply with the Affordable Care Act and new reimbursement models," analysts said in the report.
Not-for-profit hospitals have faced a myriad of challenges since 2009 and all three ratings agencies have warned repeatedly of continuing headwinds and challenges into 2015 due to low patient volume and other trends.
Moody's, like Standard & Poor's and Fitch Ratings, also notes in its latest report that the so-called credit gap between larger, higher-rated providers and smaller, lower-rated providers is likely to persist and even worsen.
Moody's projects that the largest hospital systems, with revenue above $2 billion, will likely see operating cash flow growth of 3% to 4% in 2015, while hospitals with revenue under $1 billion will likely see negative cash flow growth. The smallest hospitals are projected to suffer operating cash flow losses of 2% or more, analysts said.
"These growth patterns reflect a long-term trend that accelerated following the financial and economic crisis of 2007-2007: the largest hospitals are getting stronger, while the smallest hospitals are getting weaker," the report said. "We expect this trend to continue over the next several years as reimbursement growth slows and hospitals rely on cost cutting and productivity gains to generate the majority of cash flow growth -- trends that, in general, favor larger hospitals."
Moody's said it may change its outlook to stable if operating cash flow seemed to stabilize at 0% to 3% over the next 12 to 18 months.
"Additional factors that could lead us to change our outlook to stable include a resurgence in hospital patient volumes that compensate for revenue pressure, significant reductions in bad debt that lead to improved financial performance, or expansion of Medicaid eligibility in more states," analysts said.
