Finances at nonprofit hospitals could take a hit

Health reform and pension obligations are likely to have the most impact, say two credit agencies.

By Victoria Stagg Elliott — Posted May 3, 2010

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Health system reform could give nonprofit hospitals some short-term gains and some long-term pain, according to a credit rating agency report. Meanwhile, pension obligations also could provide a drag on those same hospitals' finances, another credit rating agency said.

Moody's Investors Service on April 12 published a report finding that although bad debt and charity care would likely go down in the immediate future, efforts to control costs would diminish revenues over time.

Increased regulatory scrutiny of insurers will make it more difficult for hospitals to negotiate better payment rates. Large health systems that can best take advantage of economies of scale are expected to be less affected than are smaller ones.

Health system reform is also expected to be a factor in the current trend toward health plan mergers.

"Consolidation will not be solely because of health system reform," said Mark Pascaris, Moody's vice president and senior analyst. "Reform is one added piece to the puzzle."

Standard & Poor's April 7 report on pension funding documented that 90.4% of institutions surveyed had pensions that were fully funded in 2007. The number dipped to 68.6% in 2009. The percentage of total assets committed to projected pension obligations also increased from 19.3% in 2007 to 20.7% in 2009.

Pension funding issues are primarily the result of recent declines in the value of various investments, and the S&P report found that obligations to retirees played a role in the ratings downgrades of numerous institutions over the past year.

A downgrade can reduce the ability of a hospital to borrow and make it more expensive to do so.

"When the funding status goes down, the contributions have to go up. And when more cash needs to go into the plan, these are dollars that cannot be used for capital or to pay employees," said Liz Sweeney, lead author on the report and S&P's director of health care ratings.

According to the American Hospital Assn., 2,923 of the 5,815 hospitals in the U.S. operate as nonprofits.

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