That slowing of healthcare inflation, fueled in part by reduced federal funding, has mixed credit implications for not-for-profit hospitals, Moody's notes. Pascaris, however, says four years of significantly lower healthcare inflation cannot be attributed solely to the slow economy or reduced revenues.
"That first couple of years of that low pace of healthcare inflation, folks were attributing it to the Great Recession and higher unemployment and people with jobs either losing health insurance or being transferred to high-deductible plans. All of those things certainly were a factor," he says. "But now that we are at a multi-year trend of this kind of inflation in our view a component of this has to do with improved management in the sector driving down a lower sector-wide rate of inflation."
Medicare and Medicaid spending now represent 23% of the federal budget, the largest slice. The CBO has projected that by 2020 spending on Medicare and Medicaid will be cut by $200 billion less than what it had projected for the programs in March 2010. Because Medicare and Medicaid combined generate about 57% of gross revenues for most not-for-profit hospitals, the effects of any funding cuts are significant.
"On balance, however, we view the trend favorably for the industry as it drives management efforts across the sector over multiple years to control spending and portends a more efficient delivery model than in past years," Moody' says in Lower US Healthcare Inflation is Credit Positive for Not-for-Profit Hospitals.
"The trick," Pascaris says, "is going to be on the expense management side of things keeping that pace moving forward."