Modern Healthcare

Medicare pay raise, delay in DSH cuts help stabilize not-for-profit hospitals

- By Alex Kacik

NOT-FOR-PROFIT HOSPITALS’ financial outlook has stabilized thanks to a significan­t pay raise from the CMS and further delay of the Medicaid disproport­ionate-share payment cuts, according to Moody’s Investors Service.

Operating cash flow will grow 2% to 3% next year, driven by the highest Medicare reimbursem­ent rate increases in around a decade, Moody’s said in the report as it changed its outlook from negative to stable. However industry observers are still cautious as notfor-profit hospitals navigate price transparen­cy mandates, threats to the Affordable Care Act, technology integratio­n, rising Medicare and Medicaid volumes, and efforts to rein in drug prices as they pertain to 340B-eligible hospitals, among other hurdles.

The CMS estimates a $4.67 billion boost in hospital payments in its 2020 inpatient prospectiv­e-payment system update, which will contribute to 4% to 5% higher top-line revenue, according to the report. Incrementa­l increases in commercial rates in much of the country as well as patient volumes will also bolster revenue. Ongoing expense rationing is poised to improve cash flow, although labor shortages will likely offset some of those gains.

Another delay in state Medicaid disproport­ionate-share hospital cuts to the tune of $4 billion will benefit many notfor-profit hospitals that care for large volumes of uninsured individual­s and those covered by the government. That delay is expected until at least late 2020.

The cuts were mandated through the Affordable Care Act on the theory that uncompensa­ted care would decrease as more gained coverage. But the rising cost of healthcare, along with the burden of high-deductible health plans and moves to undermine the ACA, have increased patients’ and hospitals’ financial exposure. The CMS’ plans to cut Medicare reimbursem­ent under the 340B drug discount program and site-neutral payment are also looming.

While many health systems have implemente­d cost-cutting strategies, digital patient-facing technology and revenue stream diversific­ation efforts, a conservati­ve approach is still warranted, said Gurpreet Singh, a partner at Pricewater­house-Coopers and leader of its health services sector.

“I generally agree that those health systems are better set up for success, but I would expect technology investment not to decrease but increase,” Singh said, adding that hospitals must manage that technology investment in the context of pricing growth and other broader trends. “There has to be a real focus on understand­ing how to get the

The CMS estimates a $4.67 billion boost in hospital payments in its 2020 inpatient prospectiv­e-payment system update, which will contribute to 4% to 5% higher top-line revenue.

most value out of the technology.”

Additional cash flow may fuel mergers and acquisitio­ns, analysts said. Moody’s expects M&A activity to pick up as hospitals look to gain leverage with commercial insurers. Smaller hospitals will also benefit from buyers’ access to capital and informatio­n technology, according to the report.

Analysts noted that slight commercial reimbursem­ent rate increases will lift revenue. But hospitals in some markets indicated that commercial insurers are increasing­ly denying reimbursem­ent or requiring significan­tly more documentat­ion before paying claims, thus increasing revenue-cycle costs.

Patient volume will continue to grow, although at slower rates, Moody’s predicts. More will shift to the outpatient sector and to observatio­n stays, which will curb revenue.

Hospitals stand to lose revenue as baby boomers shift to Medicare over the next decade and drop commercial insurance, analysts said. Medicare patients accounted for 46.8% of not-forprofit hospitals’ business in fiscal 2018, up from 44.1% in fiscal 2014, Moody’s data show.

Meanwhile, wage growth has paled in comparison to deductible growth, increasing patients’ and hospitals’ exposure. Deductible­s increased 162% from 2009 to 2019 while wages only rose 26%, according to data from Moody’s, the Bureau of Labor Statistics and the Kaiser Family Foundation.

A shift from commercial­ly insured to government-backed coverage typically doesn’t lend itself to bottom-line improvemen­t, said Jeff Goldsmith, national adviser for Navigant. “Revenue growth is one half of making money; the other is not letting expenses grow more,” he said. “That is the worry.” ●

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