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Bleak outlook from Moody’s
In a December 4 report, Moody’s revised the 2018 outlook for the not-for-profit healthcare sector from stable to negative based on the expectation that operating cash flow will contract by 2%-4% over the next 12-18 months.

Operating cash flow declined more rapidly than expected in 2017, the agency says. Also, the cash flow spike from insurance expansion under the Affordable Care Act in 2014 and 2015 has largely worn off, but cash flow has not stabilized in the current environment, which Moody’s characterized as low-revenue and high-expense.

The agency says hospital revenue growth is slowing and is expected to remain slightly above medical inflation, which declined to a low of 1.6% in September 2017. “The inability of hospitals to translate volume growth into stronger revenue growth is due to the lower reimbursement rate increases across all insurance providers and higher expense growth,” it adds.

Hospitals are being squeezed between high costs for labor and lower reimbursements from Medicare and Medicaid, which together accounted for 60% of gross patient revenue in 2017. To make matters worse, bad debt is expected to grow in 2018 because of high deductibles, rising copays, and contracting enrollments in insurance exchanges.

“Heightened operating pressure will drive additional consolidations. We expect that mergers and acquisitions will continue at a rapid pace as smaller and more rural hospitals struggle for financial stability,” the agency says.

Perhaps no statistic conveys the writing on the wall more vividly than the rapid deterioration in Medicare margins. In 2001, the aggregate margin from Medicare was a positive 5.5% but on a slippery slope. By 2015, margins had declined to a negative 7.1% and are expected to sink to a negative 10% in 2018, according to the Medicare Payment Advisory Commission. MedPAC is an independent agency that advises Congress on Medicare.

Hospitals have countered by seeking to reinforce their bargaining power against commercial insurers, often through consolidating horizontally, pursuing mergers, and buying physician practices. The efforts have succeeded for the most part as payments from commercial insurers average about 50% higher than hospital costs and often far more than 50% above Medicare prices, according to MedPAC.

The result is that hospitals’ all-payer profit margins reached 30-year highs in 2014 and 2015, averaging more than 7.3% nationwide, the agency notes. But hospital groups protest that these figures are based on aggregate data, and those paint a rosy picture because the figures include performance of hospitals in growing and thriving metropolitan areas like Atlanta, Denver, and New York City.