Shaky Financial State of Not-for-Profit Hospitals Persists

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NFP-thumb1When it comes to increasing operational efficiencies, not-for-profit hospitals are pulling their weight, John Commins reports at HealthLeaders Media.

In fact, 2012 was a successful year in discovering the “careful balance” needed to “offset growing costs, lower volumes, and other financial pressures.”

The question Commins posits is whether this careful balance can be sustained and built upon in 2013, especially since Standard & Poor’s Rating Services is indicating that “the not-for-profit healthcare sector will likely see weakened median ratios in 2013 in the face of those continuing and growing incremental pressures that include healthcare reform.”

S&P analyst Kenneth T. Gacka explains that hospitals and healthcare leaders overall are doing their best to rein in costs, reduce their workforce, renegotiate supply contracts, create staffing efficiencies, etc. In fact, he emphasized many organizations were already incorporating these reforms into their operations before PPACA came along, and with an increased focus on these reforms, it’s going to be difficult for them to find “additional savings.”

“From our perspective in discussions with management, this has been going on for a number of years so you get to the point of how much longer you can take those things,” he observed. “Some of the low-hanging fruit is picked so it gets to the next level of additional efficiencies.”

According to Gacka, many of the healthcare leaders S&P surveyed are looking to implement Lean methodologies and examining “clinical variations, differences in practice, to get the harder-to-get structural savings out of the organizations.”

Most disturbing perhaps, Commins writes, is “some stand-alone providers in particular are experiencing weakening financial operating performance even in the face of revenue growth, a trend that S&P believes will be exacerbated with further declines in utilization, smaller rate increase for services, and continued investment in technology and physician compensation.”

Which is why Gacka predicts more mergers and acquisitions will take place in the near future.

He points to “a number of forces” influencing the M&A trend, including “economies of scale, better negotiating clout, and being able to fixed costs over a bigger revenue base; another is that as organizations prepare for the evolving healthcare environment, you have the push toward population health management and also growing vertically to give organizations that experience in managing the whole continuum of care, whether that be adding an insurance plan to get experience with risk.”

Martin D. Arrick, another S&P analyst, points to “various incremental pressures” that taken together are transforming “the fortunes of the broad sector and where it is going.”

Arrick doesn’t believe resolving sequestration at this point in time will have much of an impact, explaining, “We are constantly on the lookout for stuff, but our view is that Medicare and government reimbursements are going to continue to be tight for an extended period of time. A sequester is part of that but annual update factors are a part of that, a broad movement to limit disproportionate share funding is part of that… But no one thing changes the bigger picture that we expect overall performance to be compressed.”

If this is the indefinite state of the healthcare industry, how do you as a healthcare leader orient your operations to secure the future of your organization? How do you as a healthcare leader do more than you’re already doing to trim costs and raise quality? And finally, do you foresee a merger or an acquisition being in your organization’s future?

-by Pete Fernbaugh

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