Nonprofit hospitals in 2013: Stable, frugal, fewer

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The fiscal health of nonprofit hospitals is expected to remain stable in 2013, according to Fitch Ratings, but standalone hospitals will be especially vulnerable if deep cuts in federal reimbursement occur over the year.

“Operating margins within this sector are expected to be stable or perhaps marginally lower as providers continue to realize benefits in areas such as shared services consolidation, supply chain improvements, labor and productivity efforts as well as clinical redesign,” said Jim Lebuhn, healthcare senior director at Fitch, during a conference call on Dec. 13. He projected that nonprofit hospitals will see profitability preserved in 2013, barring unexpected cuts in Medicare and Medicaid reimbursement.

The Supreme Court ruling on the Patient Protection and Affordable Care Act of 2010 and re-election of President Obama removed impediments to implementation of the law, but Lebuhn said there was still much uncertainty about its impact.

Readmission penalties are not a major concern in 2013, though. “The penalties for readmissions will be fairly small in 2013 and are not expected to have a material impact on the sector’s financial performance,” he said.

Capital spending will remain “relatively muted” compared with spending before 2009, with expenditures mainly focused on health IT and outpatient expansion. Lower spending on capital combined with solid operating performance and profitability point to improved liquidity ratios, which Fitch views as a positive trend.

Lebuhn said merger and acquisition activities will continue to be “brisk” as hospitals look for opportunities to achieve greater operating and clinical efficiencies. But he added that increased M&A activity is likely to increase the gap between higher-rated and larger hospitals and hospital systems and lower-rated single-site hospitals.

“We expect to see that credit gap continue to widen in 2013 as lower-rated borrowers and providers will find it increasingly difficult to maintain performance in a tighter reimbursement environment, moving from fee for service to a value-based population management.”

Fitch anticipates that hospitals should be able to absorb modest cuts in Medicare or Medicaid reimbursement, but he warned that budget deals that included steep reductions likely would prompt Fitch to revise its outlook downward.  

Fitch Ratings in a global rating agency with U.S. headquarters in New York City.