Moody's: Health Reform Will Drive Consolidation, Hinder Credit for Nonprofit Hospitals

Healthcare reform will have a long-term negative credit effect on not-for-profit hospitals, even though it will reduce bad debt expenses and charity care, Moody's Investors Service said in a new report.

"The key longer-term challenge for the not-for-profit hospital sector is the reform's reliance on extracting long-term cost efficiencies from hospitals, probably resulting in diminished hospital revenues," said Moody's Vice President Mark Pascaris, author of the report, Long-term Credit Challenges of Healthcare Reform Outweigh Benefits for Not-for-Profit Hospitals. "The trend will become more pronounced over time as key provisions of the law do not become effective until 2014."

Pascaris said the reform will complicate negotiations for nonprofit hospitals with private health insurers because of the federal government's increased regulatory scrutiny of insurers. Hospitals will also face reimbursement pressures from CMS because the reform squeezes savings out of existing government healthcare programs, under the new Center for Medicare and Medicaid Innovation. The reform additionally creates a Medicare bundled payment pilot program, and other payment models that will mean further cuts to Medicare/Medicaid, Pascaris said.

"Even though many of the most efficiently operated health systems will take advantage of the new opportunities to leverage economies of scale and scope to broaden their market reach and strengthen their position, healthcare reform is a long-term net negative for the not-for-profit hospital sector because it will effectively reduce revenues to hospitals,” said Pascaris.

The reform will encourage even more consolidation of the industry, as bigger health systems leverage economies of scale and have greater access to credit.

"Many not-for-profit hospitals, especially single-site and small hospital systems, may struggle," said Pascaris. "In fairness to the new law, centralization is a market force well under way, but is one that may be exacerbated by healthcare reform."