NEW YORK - Driven by increased revenue pressures and challenges resulting from the transition to a new healthcare delivery model as a result of national healthcare reform, the outlook for the U.S. not-for-profit healthcare sector remains negative for 2012, says Moody's Investors Service in a report.

"The outlook has been negative since 2008 because various economic and regulatory risks remain elevated compared to the pre-2008 period," said Moody's Vice President -- Senior Analyst Brad Spielman, author of the report. "While performance within the sector is expected to remain variable in 2012, the preponderance of credit factors is negative, and is expected to remain negative for the next several years."

In addition to the modest projections for hospital revenue growth over the next 18 months, Moody's negative outlook for 2012 is based on the expectation of ongoing national economic softness, financial and operating pressures resulting from regulatory changes, and continued balance sheet challenges. The sluggish economy is the driver of weaker financial results manifested in softer volumes, weaker payer mix, and stressed operating results.

"Ongoing uncertainty about changing regulatory requirements, healthcare reform and severe federal budgetary stress is putting pressure on hospital management teams as they prepare for the coming era of lower reimbursements and different payment schemes under new business models," said Spielman. "The pressure is being applied by all sources of hospital revenue, including Medicare, Medicaid, and commercial payers."

The Moody's report also identifies continuing balance sheet pressures due to one or more risks, including: investment value losses caused by continuing volatility in the equity and bond markets; pension funding obligations; increased exposure to non-cancelable operating leases; negative valuation of swap portfolios; and increased capital spending funded with cash reserves.

"Positive factors for the sector include a trend towards mergers and acquisitions that, on balance, is a long-term positive for the industry and provides an exit strategy for bondholders," said Spielman. "Overall stable financial performance and ongoing expense reductions point to improving management and governance in the sector."

Not-for-profit hospitals and health systems are also benefiting from historically low interest rates and reduced expense growth, and growth in state-administered provider fee programs, creating short-term relief from Medicaid reimbursement pressures.

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