Warning Signs

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What will some recent ominous headlines mean for the future of healthcare?

Recent months have seen a steady stream of bad tidings concerning the growing headwinds facing hospitals in these United States. You might rightly wonder where these analysts have been the past few years as hospitals have struggled with growing bad debt expense and pressure from the uninsured, but a general good feeling probably existed because hospitals had historically easy access to capital in the run-up to the credit crisis, masking some of the operational challenges coming down the pike—such as consumer-directed healthcare, which is now magnifying the collection woes hospitals once blamed on the uninsured.

It's a tough market to stay ahead of, analysis-wise. On the one hand, healthcare in general—and hospitals in particular—are dealing with some of the same headwinds the rest of us are facing. Higher gas prices, inflation, rising wage pressures. Conflicting headlines render the financial future of healthcare uncertain. With the lack of a clear financial direction for the industry as a whole, here is a look at some of the recent headlines, good and bad, and what they portend for the healthcare industry.

Numbers of the uninsured are dropping
The U.S. Census Bureau says the number of uninsured are dropping, from approximately 47 million in 2006 to an estimated 45.7 million in 2007, which represents a decline from 15.8% uninsured in 2007 to 15.3% in 2008. Many people don't really believe those numbers are accurate, but as long as the survey methodology doesn't change, the data can effectively show trends, and a half-percent drop in the uninsured is nothing to sneeze at.
Effect: Positive

Pressures mounting on hospitals
Moody's Investors Service sent out a report in September that sounded an alarm for operating pressures on hospitals. Based on audited 2007 financial statements for 410 freestanding hospitals, those pressures are resulting in a slower revenue growth rate. Further, revenue is growing slower than expenses. According to the report, median annual expense growth declined to 7.4% in FY 2007 from 7.8% in FY 2006, while the median operating revenue growth rate decreased to 7.2% in FY 2007 from 7.3% in FY 2006. The positive kernel to be taken from the report, though, is that hospitals are reducing their expense growth far faster than the revenue growth rate.
Effect: Negative

Credit quality slipping
Another major rating agency sees dark clouds on the horizon for hospitals as financial metrics for the hospitals they rate have declined in recent months. "We expect the number of downgrades to exceed upgrades for the rest of 2008 and probably in 2009, as business and financial challenges squeeze operating margins and weaken balance sheets," Standard & Poor's credit analyst Martin Arrick says.

However, even that report doesn't paint a clear picture, as Arrick expects a rich-get-richer trend to intensify in nonprofit healthcare. The stronger credits are doing quite well, while smaller and already lower-rated credits are struggling more mightily.
Effect: Negative

So take these sometimes-conflicting pieces of news for the picture they paint—a broad, macro view of the state of the healthcare industry. Of course, your experience in your own market may be much different. That's where the devil is in the details when you're trying to analyze the health of the industry.

Philip Betbeze

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