Analysts Differ on How ACA Will Affect Hospitals

The uncertainty of the effects of the Affordable Care Act (ACA) and delivery reform seem to be pulling investors and analysts in opposite directions.

For-profit hospital shares have soared in the past 12 months. Dallas-based Tenet Health Corp. has increased 70 percent. The share price of HCA, which has a large DFW presence, is up 36 percent. Analysts say investors expect the ACA’s individual mandate to create new millions of new patients and improve the payer mix. They also say for-profits can withstand reimbursement cuts because they have access to debt and equity markets for acquisitions and capital needs. The increasing pace of hospital mergers also is also seen as a positive trend.

Meanwhile, Moody’s Investor Service downgraded a record $20 billion of debt in 2012, compared with $6.4 billion in 2011.

In its year-end report, Moody said, “The pace of downgrade activity increased during 2012 after declining in 2011 to the lowest level in over a decade. This reflects reduced or slowed reimbursement from major payers, both governmental and private, as the healthcare industry remains under pressure from policymakers and the general public to reduce costs. Supplemental payments to hospitals, including disproportionate share payments (DSH) from Medicare and Medicaid are set to be reduced significantly over the next several years and are a factor in our 2013 negative outlook on the sector.”

Moody said it anticipated more downgrades than upgrades in 2013 “as payer pressure accelerates.” It noted that Medicare, which is the largest revenue source for most not-for-profit hospitals, is a major target for federal deficit reduction. It also mentioned that Medicaid is under continuous pressure because of strapped state budgets and that Medicaid would not be expanded in several states with high-uninsured rates, such as Texas.

“With expected flat revenue growth and many low-hanging expenses already removed from operating structures, management teams and hospital boards will seek deep process changes to reshape their model of healthcare delivery and create greater efficiencies,” the rating service said.

Rating actions in 2012 for local not-for-profits included:

Baylor Health Care System—It affirmed the system’s Aa2 bond rating, but revised its outlook from stable to negative in April. Despite praising the system’s strong and consistent financial performance, it said the system’s cash position was below the median of its Aa2 peers and that it increasingly relied on joint ventures to generate strong cash-flow margins.

Children’s Medical Center—It assigned an Aa3 rating to its $164 million of bonds and upheld its stable outlook in May. Moody’s praised the hospital’s management for being “proactively engaged in offsetting cuts to the Medicaid program in Texas through strategic growth strategies and expense reduction initiatives.”

Texas Health Resources—It assigned an Aa3 rating to $100 million of fixed rate taxable bonds and $50 million in tax-exempt variable rate demand bonds. It also revised the system’s outlook to stable from negative in September. The rating service cited the strength of THR’s balance sheet, its improved operating results during the first half of 2012 and its successful integration of Medical Edge, which it bought in late 2010.

JPS—It assigned the Tarrant County Hospital District’s (TCHD) a Aa3 revenue bond rating for $14.7 million in refunding bonds, and revised its outlook from stable to negative in February. It based its revised outlook on “a fundamental downward shift in operating performance in recent years and a material departure from historical levels due to growth in uncompensated care, increased revenue pressures, and a growing expense base, challenges that are expected to continue. Furthermore, TCHD’s high dependence on federal and state funding makes it increasingly vulnerable to any changes in Medicare, Medicaid, and supplemental funding programs.”

Christus Health—It affirmed the Irving-based system’s A1 unenhanced bond rating and reaffirmed its stable outlook, citing continuing improvement in performance, in July.

Richardson Hospital Authority—It upgraded its 2004 bonds to A1 from Baa2 in September after it was purchased by Methodist Health System, and affirmed its stable outlook.

Steve Jacob is editor of D Healthcare Daily and author of the new book Health Care in 2020: Where Uncertain Reform, Bad Habits, Too Few Doctors and Skyrocketing Costs Are Taking Us. He can be reached at steve.jacob@dmagazine.com.

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