The outlook for the US not-for-profit and public healthcare sector will remain stable in 2017, reflecting a modestly positive pace of operating cash flow growth in the next 12-18 months compared to the previous two years, Moody’s Investors Service says.
“Following two years of extraordinary growth associated with expansion under the Affordable Care Act, hospital operating cash flow has moderated to 0-1%. Top-line revenue growth continues to be strong, but constrained increases in reimbursement rates and rising expenses will counteract that growth,” Eva Bogaty, a Moody’s Vice President – Senior Analyst says.
The stable outlook incorporates the expectation of some near-term uncertainty around the future of the Affordable Care Act (ACA) given President-Elect Trump’s calls for a “market-based alternative.” While it may keep some facets of the ACA intact, an increase in uninsured volumes would be negative for the NFP healthcare sector if Medicaid expansion and the exchanges are not replaced.
The report, “Not-for-Profit and Public Healthcare – US: 2017 Outlook - Volume and Revenue Growth Drives Stability, But Operating Pressures Persist,” says inpatient volume growth will also stabilize at 1% as more Americans are insured.
Patient volume will also be tempered by the continuing rise in outpatient services and by hospitals tapping new markets, such as urgent care and quick visit locations. Ongoing physician practice acquisition will also help support patient growth volume.
In addition to rising healthcare costs, bad debt is rising as expected, especially in non-Medicaid expansion states. In Medicaid expansion states, strong declines in bad debt will moderate because the benefits of expansion have largely been realized.
Rising expenses in the form of higher pharmaceutical, personnel, and pension costs will compress operating margins. Hospitals have been employing more physicians and acquiring physician practices in an effort to manage the transition to population health strategies, such as the introduction of value- and risk-based models. This transition requires significant technological investments.
Moody’s would consider changing the outlook to positive amid the anticipation of sustained operating cash flow growth above 4% over a 12-18 month period, after accounting for healthcare inflation. The outlook could be changed to negative if business conditions weakened leading to flat or negative operating cash flow, after inflation.
