CHICAGO – The Affordable Care Act is helping lift the non-profit health care sector out of its years-long torpor, according to Standard & Poor’s.
“The ACA has had a very significant effect on volume, on payor mix, and in particular on reduction in uncompensated care,” S&P analyst Martin Arrick said Thursday during a webcast on the rating agency’s 2014 medians and outlook for the sector. “There has been an improvement in overall sector performance and I think that’s really fairly clear, and in the current year we’re continuing to see strength in financial performance.”
S&P revised its outlook on the sector earlier this week to stable from negative in light of recent improvements.
The positive trend has been noted by all three ratings agencies. Moody’s Investors Service in late August revised its sector outlook to stable from negative and Fitch Ratings, in its 2014 median report released in mid-August, said it saw surprising gains last year that it expects to continue through this year. Arrick noted that the new federal health care law did not fully take effect until a few months into 2014, and so is expected to have an even stronger impact in 2015.
In 2014, operating margins were a “bright spot with improvement across almost all rating levels,” S&P said.
The sector saw a boost in inpatient volume, which has been flat or declining for years.
The new law means more people are covered by insurance, helping lift volume and decrease the amount of bad debt.
At the same time, people with high-deductible insurance plans are getting more comfortable with using those plans, and the falling employment rate has meant more people have jobs, analysts said.
Providers that operate in states that have expanded their Medicaid programs as allowed under the ACA have seen even stronger gains, S&P said. Hospitals in those states have seen upgrades outpace downgrades by almost two to one, according to Arrick.
“Medicaid expansion is hugely beneficial,” Arrick said. “We are seeing a three or four percentage point change in payor mix, and those are big changes.”
But pressures remain, S&P, like Moody’s and Fitch, warned.
Hospitals have become conservative about issuing new-money debt over the last several years, and that has meant a rise in the average age of plant that could pose a challenge, analysts said.
Arrick said some of the benefits tied to the ACA could be temporary, such as from the Medicaid expansion. One reason is that states may find it difficult to fund the program as they take on an increasing financial responsibility to cover it.
The so-called credit gap between larger, higher-rated systems and smaller, lower-rated hospitals, continues to persist, according to S&P. And another type of credit gap is emerging, Arrick said, this one between providers who are taking advantage of the growing consumerism in the sector and those who are not.
“Some of the more sophisticated systems are really developing population health capacity and as they do that, that dovetails completely with the growing consumerism trends that we’re seeing,” he said. “The movement toward population health does have an appeal for a certain group of consumers, and if you are able to do a good job, then it’s a different kind of credit gap.”
On the debt side, providers continue to be conservative about issuing new-money bonds, with capital spending declining in 2013 and 2014. But volume has perked up this year, analysts said. The bulk of that comes from refundings, but more hospitals are beginning to issue new-money debt as well, according to S&P.
The industry is seeing lots of good news, but “yet we’re fairly careful to say the set of pressures facing the industry is in fact still there and that’s not going away,” Arrick said.
