Pennsylvania Nonprofit Hospitals under Financial Pressure

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December 18, 2014;Pittsburgh Tribune-Review

Hospitals, like the rest of the healthcare sector, have long felt stuck between a rock and a hard place in many ways, including healthcare finance. One might think that more patients means more revenue for hospitals, but this is not really the case.

It’s true that more people are covered by health insurance provided through the private market (thanks in large part to subsidies available through the healthcare exchanges) as well as through the expansion of Medicaid eligibility in about half of U.S. states. This adds to gross (“top line”) revenue for providers. The challenges hospitals face include lower reimbursements from Medicaid patients, the need to attract more providers and make available facilities to serve a larger patient population, and a rise in uncompensated care (charity care and bad debt) costs from patients unable to pay the deductibles and co-pays required under their insurance coverage. Rising deductibles and co-pays have also contributed to a decrease in elective surgeries and procedures, fees from which often help support budget shortfalls in other hospital and provider operations. Thus, net (“bottom line”) revenue is reduced, or a hospital becomes unprofitable, even as gross revenue increases.

With rising demand for services and shrinking of net income, nonprofit hospitals are feeling the pinch. Some are reducing employee rosters; others are seeking merger partners. This article in the Pittsburgh Tribune-Review mentions three recent mergers in the Western Pennsylvania area and predicts more to come. Mergers, staff reductions, and other cost-saving measures are likely to affect access to care.

The article reports that Standard & Poor’s, a bond rating agency, continues its negative outlook for nonprofit hospitals based on financial and industry information. NPQ has followed this continuing bad news for hospital bond ratings. Bond ratings are closely tied to the amount of cash on hand a hospital or other borrower has; the more cash on hand, the higher the bond rating and the lower the interest rate the borrower has to pay its bondholders. Shrinking margins and increases in uncompensated care will make it tougher for hospitals to maintain high ratings, resulting in increased borrowing costs and, possibly, changes in capital expenditure patterns.

More people having access to health insurance is a good thing, since it leads to more people seeking healthcare. Critics of the Affordable Care Act (ACA) would point out that the resource squeeze on hospitals was entirely foreseeable. Newly covered individuals increase demand for services. Though insured, many have insurance providers (especially Medicaid) less able or willing to pay reimbursements in line with costs. Economically vulnerable patients are less able to pay the deductibles and co-pays, which are then forced onto the hospitals and other providers.

Advocates of the ACA point to longer-term savings in overall healthcare costs through wellness promotion and the ability to focus on continuity of healthcare rather than episodic interventions to treat illnesses and repair injuries. Will this turn out to be correct? How will nonprofit hospitals (and other providers) survive the squeeze between the fee-for-service model of the present and the wellness model of the future?—Michael Wyland