"You have a number of forces driving that," he says. "One being the traditional benefit that you think of in terms of 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."
S&P analyst Martin D. Arrick says he doesn't see things getting better in the not-for-profit hospital sector even if the 2% Medicare cuts mandated by sequestration is eventually resolved.
"There are so many forces. We call them 'various incremental pressures' but the key word is 'incremental.' Each one by itself is not the main driver, but taken together they are forcing the direction," he says. "There is probably no one single thing if it gets reversed like the sequester that will change the fortunes of the broad sector and where it is going."
"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," Arrick says.
"If you said every single government action gets reversed and we are going back to 3% rate increases, no sequester, bumper cash flows for DSH, that would be a lot of things going in the right direction. That is a big plus. If one thing gets turned around it's great, people will be happy that one little piece of the cuts get changed. But no one thing changes the bigger picture that we expect overall performance to be compressed."