August 18, 2014—Nonprofit hospitals and health systems remained barely in the black in 2013 and signs point to even more financial pressure ahead, Standard & Poor’s Ratings Services warned last week in two new reports.[ms-protect-content id=”2799″]
In a third report on hospital and insurer financial performance during the second quarter of 2014, the credit ratings agency said, “If anything is clear, it’s that pharmaceutical prices will continue to rise, with high-end specialty drugs causing growing headaches.”
Nonprofit hospitals that serve a high volume of low-income patients and that have contracts with a state or local government to care for patients who do not qualify for Medicare or Medicaid are eligible for 340B drug discounts. Drug manufacturers and others question whether many of them deserve to remain in 340B, accusing them of program abuse and “using the poor to get rich,” as one critic wrote in Forbes last week.
The median operating margin for nonprofit health systems fell to 2.2 percent in 2013—the lowest it has been since the financial crisis of 2008—and it is expected to decline even further in 2014, S&P said.
“We believe the sector is at a tipping point where negative forces have started to outweigh many providers’ ability to implement sufficient countermeasures,” said S&P credit analyst Margaret McNamara.
For example, while health system revenue grew by 5 percent in 2013, expenses rose even more at 7 percent, S&P said. Improved investment returns is mainly what keep the nonprofit providers out of the red. Increased spending is being driven by “costs to prepare for health care reform, including technology investment and consulting fees, higher physician costs, provider taxes paid, and increased salaries and pharmaceutical costs,” S&P said. Health systems, it said, are better positioned than stand-alone hospitals “to manage and adapt to industry forces.”
A drop in charity care and bad debt expenses stemming from increased health coverage through the Affordable Care Act may be offset “from patients unable to afford high deductibles and copayments associated with their new insurance coverage,” S&P said.
S&P rates the debt of 375 stand-alone hospitals and 139 health care systems, which include about 1,362 hospitals.[/ms-protect-content]