Moody’s: Doctor integration vital to stronger hospital finances

Mergers and acquisitions of physician practices have helped put facilities on better financial footing despite declining revenue growth due to other factors.

By — Posted Feb. 11, 2013

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For the sixth year in a row, Moody’s Investors Service is issuing a “negative outlook” to nonprofit hospital finances. Yet the bond-rating agency notes that the facilities have collectively improved their bottom lines in recent years.

In part, Moody’s said, the unexpected gains have come because of physicians. Closer relationships with physician practices, including outright acquisitions, have helped hospitals stabilize their market shares and find ways to cut costs, Moody’s said. “The theme is for tighter and closer alignment and integration [of doctors] with hospitals,” said Lisa Martin, senior vice president of Moody’s Healthcare Team.

Moody’s latest report on nonprofit hospitals, released Jan. 22, said revenue growth has declined in recent years because of federal health care cuts, limited payments from health care insurers, lower patient volumes and a struggling economy.

The report states that the greatest challenge for the industry is the reduction in payments from government and business sectors. Hospitals are looking at more than $300 billion in reductions to Medicare payments in the next seven years due to reforms under the Affordable Care Act, the Moody’s report said. Medicaid payments also are expected to be reduced.

Nonprofit hospitals’ three-year compound annual growth rate of revenue fell from 7.3% in 2008 to 5.4% in 2011, Moody’s said. The measure looks at changes over the previous three years and assigns an average annual value to them.

But hospitals have taken positive steps that have prevented an even greater negative impact, Martin said. Among them are mergers and acquisitions of other hospitals, long-term care facilities and physician practices. These forces have meant that doctors are being drawn more closely into hospital operations and decision-making through joint ventures and hospital board memberships, especially as more doctors are employed instead of working in their own practices, she said.

Moody’s said low interest rates and favorable stock market returns have helped keep expenses in check while making acquisitions easier to finance.

Despite the fall in revenue growth, other financial measures for nonprofit hospitals have improved. The median operating margin has inched upward, from 2% in 2008 to 2.5% in 2011. Meanwhile, the median cash-to-debt ratio, which divides the total amount of cash on hand by the hospital’s short- and long-term debt obligations, moved up from 104.2% in 2008 to 117.7% in 2011.

Mergers and acquisitions are expected to continue through 2013 and 2014, as hospitals prepare for full implementation of the ACA. Moody’s analysts consider this activity positive, because it has led to consolidation of services and reduced expenses.

They also don’t expect an abating of physician practice acquisitions and increased doctor employment at hospitals because those trends have grown “in part due to physician preference.” Numerous surveys have shown an increasing number of doctors employed rather than in independent practice, or willing to consider such an arrangement.

But Moody’s warned that mergers and acquisitions could be difficult in the short term because of turnaround challenges at takeover targets, merging cultures and difficulty closing services after mergers.

“Overall, we view this as positive for the industry, particularly for smaller hospitals that don’t have access to capital that larger systems have,” Martin said. “But there are a lot of hurdles to get over in the initial stages.”

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