The US not-for-profit sector continues to carry a negative outlook due to established risks as well as in response to developing trends that have become more prominent since the beginning of the year, says Moody's Investors Service in a mid-year outlook report, "Not-for-Profit Healthcare Mid-Year 2012 Outlook: Strong Headwinds Continue."

"The established risks facing the industry primarily result from lower reimbursement levels that will come to fruition, with or without federal healthcare reform, and are driven by the unsustainable federal deficit and the rising share of federal spending for Medicare and Medicaid," said Moody's AVP-Analyst Daniel Steingart, author of the report, which also highlights several developing risks that contribute to the negative outlook, last updated in January.

"Most of the challenges we outlined in January are expected to persist," said Steingart. "The economic recovery will remain tepid, the transition to new payment methodologies will require significant investment, revenue growth will remain low by historical standards, and reimbursement will remain under pressure from all sources."

The most notable development by mid-year was the US Supreme Court decision that upheld the healthcare reform law, the Patient Protection and Affordable Care Act (PPACA), including the individual mandate to buy individual health insurance, which is the primary credit positive aspect of the law.

"The court also ruled that that states may opt out of the Medicaid expansion mandated by the law without penalty," said Steingart. "By limiting the expansion of Medicaid coverage, the ruling blunts the impact of one of the law's few credit positive features."

Uncertainty regarding state participation in the Medicaid expansion adds to the potential for political gridlock regarding healthcare reform, says the rating agency report, making it increasingly difficult for
hospitals to perform adequate long-term planning.

PPACA's mandated slowdown in Medicare funding remains as a significant long-term negative credit factor facing the sector, according to Moody's. November's election is another potential hindrance to long-term planning as new leadership in Congress or the White House could result in major changes, including a repeal of healthcare reform.

Other emerging trends discussed in the report are growing collaboration between hospitals and insurers and increasing hospital employment of physicians. "Both trends are related to reimbursement changes that all hospitals will experience under federal healthcare reform, and the need to strive to maintain market share," said Steingart.

Both strategies entail significant execution risk and may require upfront capital, according to Moody's, which also expects federal healthcare reform to continue driving merger and acquisition activity as hospitals seek to create greater scale and revenue diversity, as well as provide integrated care.

"All of these challenges emphasize the continued need for more effective governance and management to adapt to a rapidly changing industry and to execute various strategies," said Steingart.

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