Grim Outlook for Healthcare, Hospital Sector in 2015: Rating Agencies

(Reuters) - The outlook for non-profit healthcare remains dour for 2015, as hospital operating margins continue to face pressure from rising costs and weaker reimbursement.

The three major credit ratings agencies gave the healthcare and hospital sector a negative outlook next year, citing anticipated downgrades, declining operating cash flows, and on-going uncertainties surrounding the implementation of the Affordable Care Act.

"The negative pressures facing most providers are widespread," said Martin Arrick, services analyst with Standard & Poor's Ratings. "Many providers will not be able to adapt."

S&P forecasted more downgrades than upgrades among not-for-profit healthcare providers for a third consecutive year, as operating margins are pinched by rising costs. "There would likely have been more downgrades in 2014 if not for the high level of merger and acquisition activity which often precluded downgrades and in many cases led directly to upgrades," S&P said in its 2015 outlook.

Moody's Investors Service anticipated another 12 to 18 months of weak performance, with large hospital systems faring better from economies of scale and the ability to drive revenue growth through expanded services.

"The largest hospitals are getting stronger, while the smaller hospitals get weaker," Moody's senior analyst Daniel Steingart said.

Many hospitals have exhausted the low-hanging fruit for cost-cutting. At the same time, hospitals are expected to shift away from the traditional fee-for-service models, in which more patient services led to more revenue. The Affordable Care Act and purchasers of healthcare are now emphasizing preventative care and reduced hospital stays.

That trend might be good news for the 43 million Americans grappling with overdue medical debt, according to the U.S. Consumer Financial Protection Bureau, but not so for hospitals that historically counted on healthcare spending to balance operating budgets.

Fitch Ratings said more uncertainty is on the way, as Republicans with Congressional control vow to repeal or defund parts of the Affordable Care Act. That would "hamper the sector's ability to adapt and plan," Fitch said.

The rating agency was closely following an upcoming U.S. Supreme Court decision in the King vs. Burwell case, in which the court could effectively invalidate insurance coverage purchased through federally operated state exchanges.

"The hospital sector has navigated many challenging environments in the recent past, but the upcoming years represent a true transition as the core model of healthcare delivery and reimbursement is undergoing redesign," said James LeBuhn, Fitch senior director.

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