NEW YORK - As fundamental changes unfold in the U.S. not-for-profit healthcare sector, credit ratings will rise and fall depending on how well hospital management teams adjust to being paid more for quality of service than for quantity of service, says Moody's Investors Service in a report.

"Different reimbursement models will develop in different stages over time, requiring hospitals to manage multiple and diverging payment models simultaneously, such as traditional payments that reimburse based on volumes and new methodologies based on cost and quality," said Moody's Lisa Goldstein, author of the report, "Doing More with Less: Credit Implications of Hospital Transition Strategies in Era of Reform."

Different models will create new incentives and require behavioral changes from patients, payers, physicians, and hospitals alike. Hospitals that can manage well during the current period of industry transition should be able to maintain if not improve their credit ratings, according to Moody's.

The greatest challenge identified by the rating agency will be the need for hospitals to focus on costs and outcomes while still being paid under the old reimbursement model that rewards volume. This is further compounded by a drop in patient volumes since the start of the recession, some of which is likely to remain.

"Even as future payment methodologies change at an uncertain pace, it is already clear that payment-per-procedure will decline, creating more pressure on hospital top line growth," said Goldstein. "This weaker outlook for revenue growth and the corresponding need for cost reductions are key drivers of our negative outlook on the not-for-profit hospital sector."

Payment reductions from government and commercial payers, along with different payment models and incentive changes, will require management teams to develop more robust financial plans and achieve near flawless execution of strategy, according to Moody's.

"The most meaningful cost reduction strategies will involve standardization of clinical care and elimination of variation in patient procedures," said Goldstein. "This will be a multi-year, ambitious journey requiring strong physician, management and board leadership."

"Hospitals that cannot navigate the payment reductions or reduce their expense structures quickly enough to mitigate the impact may see negative rating pressure," said Goldstein. "Robust financial planning and flawless execution will be key to success."

According to the rating agency report, the era of reform and tightened federal funding now unfolding will challenge current business models and require forward-thinking strategies to manage through a transition period that will unfold over the foreseeable future.

"The strategic shift challenges current business models and require forward-thinking strategies to manage through a transition period that will unfold over the foreseeable future," said Goldstein. "Not-for-profit hospitals face an imperative to deliver higher-quality service with lower reimbursement rates per unit of service."

The Moody's report outlines how major changes will come in the form of new Medicare reimbursement structures such as bundled payments, which will provide a single payment for a particular service line, and non-payment penalties for excessive patient readmissions. Commercial payers will also modify their reimbursement structures and reduce annual rate increases, narrowing hospitals' ability to subsidize losses from governmental payers.

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