Purchasing medical practices drags down for-profit hospital finances

Medicare rates and a decline in patient admissions are stifling short-term growth, but hospitals aren’t shying away from the deals.

By — Posted April 2, 2013

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Moody’s Investors Service expects for-profit hospitals to see weak growth in earnings, in part because of their interest in acquiring physician practices.

In a report issued in March, the bond ratings agency gave the sector a “stable” outlook, which is better than the “negative” outlook it gave to nonprofit hospital finances in a similar report released Jan. 22. Negative means that the financial situation is expected to worsen.

However, Moody’s said the same issues were affecting for-profit and nonprofit hospitals — namely, cuts to Medicare pay; a decline in admissions; and costs associated with acquisitions, including physician practices. Like nonprofit hospitals, for-profit hospitals have said they intend to buy more practice assets and then employ doctors as a way of generating outpatient income and strengthening referrals. For the moment, Moody’s said, those acquisitions, along with purchases of other hospitals, are not showing financial returns for for-profit hospitals.

“Pressure on margins will remain as hospitals continue to employ physicians and acquire physician practices and smaller or struggling hospitals with relatively low margins, which will further dilute margins, at least initially,” the Moody’s report stated.

HCA, the largest for-profit chain, does not break out in its financial reports how much it is spending on physician practice acquisitions and hiring. However, it said in its annual report that it will continue to commit to those efforts, especially with other hospitals making the same efforts. HCA is notable in that it plans to expand residencies at its hospitals, with an expected 400 to 600 slots at four hospitals in western Florida coming on board in 2014. It expects that $90,000 of the annual $150,000 cost of training a resident will come from Medicare.

LifePoint, another large for-profit hospital chain, stated in its annual report that it spent $19 million in 2012 in “ancillary service-line acquisitions” that included physician practices. It did not say how many practices or physicians that represented.

Higher earnings predicted

For-profit hospitals are expected to experience an upswing in earnings in 2014 due to the Affordable Care Act, which will result in more insured patients, Moody’s stated.

The report comes on the heels of the negative outlook issued in January for nonprofit hospital finances. The bond rating agency noted that the facilities have improved their bottom lines in recent years.

Physician acquisitions have helped these hospitals stabilize their market shares and find ways to cut costs. The report said revenue growth declined in recent years because of federal health care cuts, limited payments from health care insurers, lower patient volumes and a struggling economy.

The Moody’s report stated that the greatest challenge for the industry is lower payments from government and business sectors. Hospitals are looking at a drop of more than $300 billion in Medicare payments in the next seven years due to ACA reforms.

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