iProtean Newsletter

Hospital Deals Slow Down in 2nd Quarter

Hospital merger & acquisition (M&A) activity in the second quarter of 2018 decreased by nearly 50 percent from the first quarter according to a M&A tracking company. Analyses by other companies that track M&A activity reported a similar decrease.

 

However, physician practice acquisition remained steady in the second quarter.

 

Irrespective of these numbers, hospital M&A activity is expected to remain high in upcoming months because many health systems are in the beginning stages of discussions. Also, regional health systems are positioning themselves for future growth, according to a tracking company, citing letters of intent to affiliate issued by several organizations.

 

A recent survey of system executives by Premier found that nearly half of the systems had completed a merger or acquisition in the past two years and 77 percent expected to do so in the next two years. (To read the survey results, click here.)

 

Some analysts have questioned whether aggressive M&A is financially benefiting hospitals and health systems. And CMS has frequently questioned whether consolidation has benefited communities.

 

HFMA reported on a not-yet-released Navigant analysis of 104 of the largest U.S. health systems. The analysis “found 22 locally dominant systems each had operating earnings declines of more than $100 million from FY15 to FY17.” (“In Q2, Hospital M&A Slows, Practice Acquisition Stays Flat,” HFMA Compass, August 2, 2018)

 

From FY15 to FY17, two-thirds of the 104 health systems had declines in operating income that totaled about $5.5 billion. More than 20 percent of the health systems Navigant studied lost money on operations in both 2016 and 2017. However, those losses were masked by their investment earnings.

 

“It is so sudden and it is so weird because it’s happening at the top of the economic cycle,” a Navigant adviser said. “Usually hospitals’ profits disappear after a recession.” (“In Q2, Hospital M&A Slows, Practice Acquisition Stays Flat,” HFMA Compass, August 2, 2018)

 

The financial challenges have been compounded by expenses that have risen three points faster than revenues, consumer-directed health plans that have cut into consumer demand (particularly for surgeries), and “mergers that didn’t make sense,” the analyst added. (“In Q2, Hospital M&A Slows, Practice Acquisition Stays Flat,” HFMA Compass, August 2, 2018)

 

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, is in your library. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

Our upcoming course focuses exclusively on costs and both traditional and innovative approaches to cost reduction. Look for it soon in your library!

 

 

For a complete list of iProtean courses, click here.

 

 

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CMS Proposed Rule Will Cut Medicare Spending by $760 Million

CMS recently released its proposed rule for changes to the Outpatient Prospective Payment System (OPPS) for FY19. In addition to a proposed 1.25 percent increase in hospital OPPS rates for FY19, CMS wants to reduce payment for hospital outpatient clinic visits at off-campus provider-based departments to 40 percent of the OPPS rate.

 

The “site-neutral” policy change will largely offset the OPPS rate increase by cutting payments by 1.2 percent, according to a CMS fact sheet. CMS estimated it would cut $760 million in FY19 Medicare spending. The clinic visit is the most commonly billed service under the OPPS. (“Medicare Proposes $760 Million 2019 Hospital Cut,” HFMA Compass, August 1, 2018)

 

CMS stated that it is proposing the payment cut for provider-based department clinics because of hospital purchases of physician practices. It claimed that the hospitals’ objective in these purchases is to earn higher payment rates by designating the practices as off-campus provider-based departments.

 

The industry has responded quickly.

 

  • America’s Essential Hospitals: “Today’s proposed rule for Medicare outpatient payments would make bad policies worse, impose draconian new cuts that jeopardize healthcare access for millions of vulnerable Americans, and undermine the foundation of support for our nation’s healthcare safety net.”

 

  • The American Hospital Association: “We will urge the agency to revise these punitive policies so that hospitals can continue to provide the highest quality health care.”

 

(Both quotes from “Medicare Proposes $760 Million 2019 Hospital Cut,” HFMA Compass, August 1, 2018)

 

In its fact sheet, CMS explained its rationale as follows:

 

“. . . changes that would encourage site-neutral payment between sites of services and make healthcare prices more transparent for patients so that they can be more informed about out-of-pocket costs. . . [the] proposed rule would further advance the agency’s priority of creating a patient-centered healthcare system by achieving greater price transparency, interoperability, and significant burden reduction so that hospitals and ambulatory surgical centers can operate with better flexibility and patients have what they need to become active healthcare consumers.” (CMS proposes Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System changes for 2019 (CMS-1695-P), CMS.gov, July 25, 2018)

 

A summary of other proposed changes follows:

 

  • Extension of 340B Medicare payment rate to 340 B drugs furnished in non-grandfathered provider-based departments
  • New drugs and biological products to be paid at the rate of the wholesale acquisition cost plus 3 percent (a 50 percent reduction)
  • Changes to the patient experience measures specific to three metrics related to pain communication
  • Changes to the Outpatient Quality Reporting program including removal of 10 measures
  • A 2 percent increase in ASC rates for CY19.

 

Included in the proposed rule was a CMS solicitation for comments on the following:

 

  • Whether providers and suppliers should be required to inform patients about charges and payment information for healthcare services and out-of-pocket costs
  • Suggested changes to encourage interoperability of electronic health records or other ways to share data between providers
  • Whether CMS should revise the Conditions of Participation to require interoperability

 

Comments on the proposed rule are due by Sept. 24, with a final rule expected by around Nov. 1.

 

Read the CMS fact sheet here.

 

Read the 2019 Hospital Outpatient Prospective Payment System (OPPS) proposed rule here.

 

 

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, is in your library. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

Our upcoming course focuses exclusively on costs and both traditional and innovative approaches to cost reduction. Look for it soon in your library!

 

 

For a complete list of iProtean courses, click here.

 

For more information about iProtean, click here.  

Competition and Value Lead CMS Policy Priorities

The head of CMS outlined the agency’s policy shift to competition and choice in a recent interview.  Seema Verma noted, “Coming incentives will encourage Medicare beneficiaries to shop among providers, with those that have the lowest prices and deliver better-coordinated care gaining a competitive advantage.” (“Public Poll, Verma Reject Single-Payer,” HFMA Compass, July 27, 2018)

 

Specific points made in her interview include:

 

  • “Patients are the most valuable force in our healthcare system to create value,” emphasizing the need to cater to patients, “not providers.”
  • All levels of CMS should drive a system where providers compete for patients.
  • Pricing and clinical outcomes’ transparency is required to allow patients to shop; e.g., posting online the full chargemaster price list
  • Patients should be able to access and share their electronic health record—CMS has suggested that providers may be required to share all patient’s electronic health records as a condition of participation in Medicare.
  • CMS will “double down” on value-based payments.

 

She also noted that the president “believes competition is the key ingredient to drive down healthcare spending.” (“Public Poll, Verma Reject Single-Payer,” HFMA Compass, July 27, 2018)

 

Value-based Care Models

 

Ms. Verma criticized the Obama administration’s approach to value-based care models. She listed three specific shortfalls:

 

  1. The models overlooked the patient—providing incentives for providers but neglecting to empower the patient.
  2. Most payment models were set up to encourage consolidation in the marketplace. She noted that consolidation actually reduces competition.
  3. The models did not go far enough to make providers responsible for their own budgets.

 

She criticized one-sided risk models and claimed that “those are not the most effective way.” She said the industry needs models that will encourage the provider to take responsibility for the budget.

 

To increase Medicare provider participation in value-based payment arrangements, she said she plans to waive more program integrity rules and offer new models for primary care physicians. (“Public Poll, Verma Reject Single-Payer,” HFMA Compass, July 27, 2018)

 

 

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, is in your library. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

Our upcoming course focuses exclusively on costs and both traditional and innovative approaches to cost reduction. Look for it soon in your library!

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

Advocates Want CMS to Increase APM Options for Clinicians

The recently released “massive” Medicare physician proposed payment rule included a “surprise” projection that alternative payment model (APM) participation may decline. Provider organizations are planning member briefings on the rule. (“Providers Examining Why APMs Are Expected to Stall,” HFMA Weekly News, July 23, 2018)

 

The proposed rule continues the implementation of revisions to physician payment including the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). Under MACRA, physicians are paid by Medicare either through the Merit-based Incentive Payment System (MIPS), advanced APMs or an exempted class.

 

The vast majority of physicians continue in the exempted category, and MIPS participation is expected to slowly increase. “But provider advocates were surprised to see that Medicare expects clinician participation in APMs to stagnate or decline in FY19.” (“Providers Examining Why APMs Are Expected to Stall,” HFMA Weekly News, July 23, 2018)

 

CMS estimated that between 160,000 and 215,000 clinicians will earn APM bonuses of 5 percent of their Part B payments in FY19. That range was a decline from FY18 projections of 185,000 to 250,000, which CMS estimated in the previous physician payment rule.

 

“We are disappointed in the stagnation of the number of providers projected to be in Advanced APMs in 2019 compared to previous years,” said an executive for the National Association of Accountable Care Organizations

 

An executive from the Medical Group Management Association (MGMA) agreed and noted that MGMA will ask CMS to reverse the declining enrollment by creating more APM options for clinicians.

 

Although CMS officials didn’t address why they expected APM enrollment to stagnate or decline in FY19, some analysts offered possible explanations:

 

  • A combination of tightening qualifications for clinicians seeking the APM bonus and a lack of new models in which they can participate
  • A lack of new or returning accountable care organizations (ACOs); advocates have expressed concern that CMS has not issued guidance for starting the application process for ACOs to renew or launch in 2019—this typically happens in May
  • A lack of agency follow through on strengthening APMs, including ACOs
  • A lack of new physician-led models— the Physician-focused Alternative Payment Model Technical Advisory Committee was expected to review, assess and propose physician-proposed models to vastly increase the number of APMs and allow many more physicians to qualify for APM bonuses; however, no such models have been accepted or implemented by HHS

 

List of Current Models

 

Currently, physicians can qualify for the APM bonus if they meet participation requirements for the following models in FY19:

 

  • Next Generation ACO model
  • Comprehensive Primary Care Plus (CPC+) model
  • Comprehensive ESRD Care model (two-sided risk arrangement)
  • Vermont All-Payer ACO model
  • Comprehensive Care for Joint Replacement Payment model (CEHRT track)
  • Oncology Care Model (two-sided risk arrangement)
  • Medicare ACO Track 1+
  • Bundled Payments for Care Improvement Advanced
  • Maryland Total Cost of Care model (Maryland Care Redesign Program; Maryland Primary Care Program)
  • Medicare Shared Savings Program Tracks 2 and

 

 

Read rule here:

 

(Source: “Providers Examining Why APMs Are Expected to Stall,” HFMA Weekly News, July 23, 2018)

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, is in your library. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

Our upcoming course focuses exclusively on costs and both traditional and innovative approaches to cost reduction. Look for it soon in your library!

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here. 

Executives’ Increasing Concerns About Hospital Costs Suggest Innovative Cost Control Measures

A recent survey of hospital/health system CEOs by a national healthcare consulting company reported that cost control is their top priority. CEOs responding to the survey noted “innovative approaches to expense reduction” as the second leading priority.

 

The survey results supported an April report from Moody’s Investors Service that the median operating cash flow margin for its hospitals in 2017 declined to 8.1 percent—below levels recorded during the 2008-2009 recession. (Click here for iProtean blog/newsletter, May 29, 2018, Moody’s: Preliminary Medians Show Declining Hospital Profitability.)

 

Moody’s noted that the decline in median operating cash flow margin came amid accelerating expenses and reduced revenue growth, with expense growth in FY17 outpacing revenue growth for the second year in a row. Its analysts referred to an increase in operating expenses of not-for-profit and public hospitals, with the increase stemming at least partly from the tight labor market.

 

Similarly, the American Hospital Association’s 2018 chartbook found the percentage of hospitals with negative total and operating margins had increased by the end of 2016 to recession-era levels. (Click here for the report.)

 

 

These reports and others emphasized increased hiring and high labor costs as major contributors to escalating costs. Hospitals have talked about reducing labor costs for years, even as hiring has steadily increased. Total hospital employment rose from 3.7 million workers in 1995 to nearly 5 million in 2016, according to AHA data.

 

Health consultants and analysts have made several observations on potential innovative solutions. For example:

  • Rather than absolute labor force cuts, focus on slowing labor expense growth
  • Focus on administrative costs including achieving economies of scale when consolidating
  • Consider decreasing corporate overhead
  • Divest and outsource non-core functions
  • Undertake a critical analysis of costs incurred by acquired physician practices, and refocus on reducing tasks that detract from clinical productivity of these physicians
  • Hire more non-physician clinicians to relieve time constraints on physicians who currently are concerned that documentation requirements overshadow time for patient care

 

(Source: “What’s Driving Increased Hospital Cost Concerns?” HFMA Weekly News, July 13, 2018)

 

 

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, is in your library. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

Our upcoming course focuses exclusively on costs and both traditional and innovative approaches to cost reduction. Look for it soon in your library!

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

An Argument for Growing High-Value Service Lines

Hospitals/systems may be considering the pro’s and con’s of growing their service lines, even as they grapple with cost reduction strategies. Experts have noted the many benefits including increased patient volumes, improved health outcomes, increased market share and improved physician loyalty. If hospitals/systems focus on high-value service lines, a key benefit would be a significant return on investment and financial growth.

 

Objectives of high-value service line growth include:

 

Optimizing limited resources.  By focusing on specific services lines that show the greatest growth potential, hospitals/systems can allocate resources to achieve the greatest effect in driving revenue. The best candidates for growth potential would be identified. Then, through use of data analytics, specific strategies could be developed to improve and market the service line.

 

Driving patient satisfaction. Most U.S. cities have multiple hospitals vying for “healthcare provider of choice” for the community. To compete effectively, hospitals/systems should have effective, even aggressive strategies for attracting the consumers they want and providing them “with an exemplary experience.” Patients want “prompt service tailored precisely to their specific needs, with personalized customer service.” (“How to Grow High-Value Service Lines Effectively,” hfm Magazine, July 2018)

 

Healthcare organizations that achieve high rates of patient satisfaction realize financial benefits, according to a 2016 study by Deloitte. The authors reported that hospitals whose patients rate their experience as “excellent” have higher profitability than those with lower ratings. (Engaging with Tomorrow’s Patients: The New Health Care Customer, Deloitte, 2016)

 

Achieving lifelong relationships with patients. Marketing experts note that it’s costlier to acquire new customers than retain them. Patients who remain involved with a healthcare organization over long periods of time are for all intents and purposes repeat customers. (“How to Grow High-Value Service Lines Effectively,” hfm Magazine, July 2018)

 

Having a reputation for service-line excellence is one of the best ways to foster patient loyalty. Expertise in high-value fields often is the initial draw for patients. It creates the opportunities for the organization to engage patients and, through service excellence, high satisfaction that ensures they will continue to bring business into the organization. (“How to Grow High-Value Service Lines Effectively,” hfm Magazine, July 2018)

 

 

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, is in your library. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

New Report: Readmissions Reduction Program Doesn’t Increase Observation Stays

Through Congressional direction and previous Administration initiatives, Medicare has implemented incentives to reduce hospital readmissions. One example is the Hospital Readmissions Reduction Program (HRRP), which financially penalizes hospitals with relatively high rates of Medicare readmissions.

 

One of the criticisms of the program has been the anticipation of an increase in the number of observation stays—that is, to avoid readmission penalties, providers are placing these patients in “observation” rather than readmitting them.

 

A new analysis of the program, however, reports the program is not increasing the number of observation stays. The Medicare Payment Advisory Commission (MedPac) analysis noted that there is no evidence of an increase in observation stays because of HRRP.

 

Readmission rates from 2010 to 2016 for heart attacks, heart failure and pneumonia all dropped between 1.4 percent to 3.6 percent, saving Medicare $2 billion annually, according to MedPAC’s analysis recently sent to Congress. Over that same period, the commission found only a small increase in observation stays and noted that the increase did not offset savings from the readmissions program. (“Medicare readmissions program not causing observation stay spike,” Modern Healthcare A.M., June 18, 2018)

 

MedPac said in its report that “. . .  the reduction in readmission rates reflects real changes in practice patterns and not simply a shifting of short-stay admissions into observation stays to avoid readmission penalties.” (Report to the Congress, Medicare and the Health Care Delivery System, MedPac, June 2018)

 

However, some industry analysts dispute the validity of MedPac’s findings.  One noted that the analysis relied on observational studies that are prone to bias. Other studies found evidence that the readmission program does increase the duration and frequency of observation stays.

 

To read MedPac’s report to Congress, please click here.

 

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, is in your library. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

Moody’s: Integrated Planning Essential for Financial Viability Part 2

We’re continuing the summary of the Moody’s Investors Service report on integrated planning and financial viability. Last week we covered investments in off-campus sites while maintaining high-margin inpatient services.

 

Today we focus on the remaining components of integrated planning: digitalization, investment in talent and operational and funding flexibility.

 

Digitalization

 

Information technology investments will continue to expand digitalization. This focus includes:

 

  • Data from electronic medical records to improve clinical outcomes and for predictive and preventive medicine
  • Requirement to track value and risk-based contracts spurred by reimbursement shifts
  • Data to spur innovation
  • Comprehensive cybersecurity safeguards

 

Investment in Talent

 

Clinical staff will account for a growing portion of operating costs, particularly if the nursing and physician shortage continues. With a limited supply and rising cost of nurses and physicians, there will be a careful drive toward improving productivity and redesigning workflows.

 

Moody’s analysts noted, however, that “too strong an emphasis on productivity may increase the likelihood of clinician burnout, exposing the system to safety risks or lawsuits, or penalties under value-based reimbursement models.” Telehealth will become increasingly used as a cost-effective means of delivering care, and improving access and throughput, as opposed to staffing physicians 24/7, or paying on-call wages.

 

Operational Funding and Flexibility

 

Operational and funding flexibility in a changing healthcare environment, and the ability to grow or contract when needed, will be crucial to overall credit quality and financial sustainability, Moody’s noted in its report.

 

  • Hospitals will need to evaluate service lines and divest those that are underperforming or not core to their long-term strategy to preserve margins and rationalize capital.
  • The shift to outpatient care, combined with reimbursement challenges and increasing costs, will put pressure on margins and limit the ability of hospitals to increase cash reserves through operations.
  • Hospitals with higher liquidity will be better able to manage volatility and adapt to evolving markets.

 

With respect to capital, the analysts offered the following points:

 

  • Timing and scope of strategic capital deployment are key credit considerations.
  • Phasing in large capital programs over time may provide flexibility to respond to unexpected shortfalls.
  • Deferred capital on the other hand can put the organization at a competitive disadvantage.
  • If not implemented appropriately, execution of simultaneous large-scale strategies will weaken credit quality.
  • However, long-range financial plans and a demonstrated ability to execute and respond to market conditions will be crucial to maintaining a strong credit profile.

 

Summary

 

Analysts concluded that it pays to “remain nimble” when planning for change. Various tactics include:

 

  • Commitment of the board to approve multi-year strategies
  • Willingness to embark on various strategies without short-term returns on investment
  • Ability to assess performance at various midpoints and change course
  • Integrated long-term financial, capital and strategic planning
  • Commitment to change skill set of management as strategies change
  • Willingness to change the culture of the organization through growth or merger strategy
  • Physician participation and buy-in

 

(From Flexibility, integrated planning key to the healthcare system of the future, Moody’s Investors Service Sector In-Depth, May 16, 2018.  iProtean thanks Moody’s Investors Service for its permission to excerpt portions of this Sector In-Depth.)

 

 

iProtean subscribers: The Volume to Value Paradox featuring Nate Kaufman, Marian Jennings and Dan Grauman, is in your library. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

 

For a complete list of iProtean courses, click here.

 

 

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Moody’s: Integrated Planning Essential for Financial Viability

Evolving industry pressures will require hospitals/systems to focus on their business strategies and prudent allocation of limited capital and financial resources.  Financial viability and competitiveness will require expanded patient access, digital efficiencies, top talent and financial flexibility.

 

Moody’s Investors Service analyzed each of the above components in its recent Sector-in-Depth, Flexibility, integrated planning key to the healthcare system of the future. We present a partial summary of its report today and will continue with the remaining components next week.

 

Balancing investments in access points with maintaining high-margin inpatient services

 

Outpatient facilities will continue to be an efficient and cost-effective way of treating lower severity cases and of expanding into underserved areas; however, margins are generally weaker than for inpatient services. Moody’s anticipates that traditional bed space will be reserved for scheduled cases of mainly higher acuity and surgical patients. Most medical cases, particularly unplanned, will be cared for as outpatients in ambulatory or micro-hospital settings. This evolution will eventually lead to hospitals, especially academic or more advanced tertiary facilities, becoming large intensive care units.

 

Some key points in the inpatient/outpatient discussion include:

 

  • Outpatient visits tend to be reimbursed at lower rates than inpatient stays.
  • Outpatient sites generally require less capital investment and have lower overheads than inpatient facilities, allowing them to be operated profitably.
  • Hospitals that are disproportionately dependent on lower acuity inpatient admissions will be at a disadvantage with the shift toward greater outpatient care. (However, Moody’s noted its data show hospitals with greater dependency on inpatient admissions generally have higher margins.)
  • The number of available inpatient beds will not remain aligned with overall population growth as hospitals shift lower acuity cases to outpatient settings.
  • Capital investment in traditional inpatient facilities will be increasingly targeted towards higher acuity, more intensive cases that cannot be treated in an outpatient setting.
  • Moody’s analysts expect growing investment in intensive care units and larger operating rooms to accommodate newer technologies such as surgical robots.
  • Consumerism and changing standards of care will continue to drive the shift to single-occupancy rooms, sometimes reducing overall bed count as double-occupancy rooms are converted.

 

The analysts also pointed to the acceleration of joint ventures with physicians and non-acute care providers and disruptive strategies by health insurers—for example, acquiring and integrating with physician groups and outpatient service providers—as increased direct competition with hospitals, putting further pressure on volumes and margins.

 

 

 

The Volume to Value Paradox advanced Quality course, featuring Nate Kaufman, Marian Jennings and Dan Grauman, will be in your library later this week. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.

 

Moody’s: Considerations for the Board’s Investment Committee

Balance sheet strength, measured on both an absolute and relative basis, as well as liquidity, significantly drives not-for-profit and public hospitals’ credit quality. Stock market growth over the last several years has been impressive. However, in keeping with historic trends, volatility—temporary market fluctuations or a short-term downturn—will trouble institutional investors in the near term, according to analysts.

 

Major prolonged market downturns that result in sustained investment losses can affect a hospital system’s liquidity and credit quality, relative to other credit factors, noted Moody’s Investors Service analysts in a recent Sector In-Depth publication.

 

However, short-term and temporary market fluctuations will likely have minimal effect on credit quality. The Moody’s analysts wrote that they anticipate “some amount of investment volatility and market swings, such as we have seen in recent months, given the long-term horizon of many hospitals’ portfolios.” (From FAQ: Effect of investment market returns on hospital credit quality, Moody’s Investors Service Sector In-Depth, May 15, 2018)

 

The Sector In-Depth report presented a series of frequently asked questions. They appear below.

 

  • How does market volatility, including investment losses, affect hospital credit quality?

A limited period of market volatility is not likely to affect long-term credit quality. However, longer term investment market declines and a system’s inability to manage liquidity during this period may affect credit quality. Moody’s analysts evaluate a system’s investment allocation on the basis of its liquidity, short-term and long-term goals, risk- versus-reward appetite and diversification, relative to the demands on capital.

 

  • How do not-for-profit and public hospitals typically allocate their investments?

Asset allocation can vary widely based on a system’s size, the amount of investable assets, ownership, risk appetite and cyclicality of capital spending. Most invest in fixed income and equities with a smaller subset who invest in alternatives.

 

  • How liquid are hospitals’ investments?

Hospital portfolios are highly liquid. Over the past five years, monthly liquidity as a percentage of total cash and investments has remained very high at 97 percent in fiscal 2016.

 

  • How do you assess a system’s liquidity relative to its debt burden?

Moody’s compares a system’s liquidity to its debt burden. Greater liquidity indicates a greater ability to meet short-term needs, such as demand debt, and is viewed favorably.

 

  • Why do higher rated systems have less liquid investment strategies?

Many higher rated hospitals have lower liquidity levels because they tend to employ more illiquid investment strategies. A system’s credit quality may be affected if short-term liquidity needs outweigh the amount of available funds.

 

 

(From FAQ: Effect of investment market returns on hospital credit quality, Moody’s Investors Service Sector In-Depth, May 15, 2018.  iProtean thanks Moody’s Investors Service for its permission to excerpt portions of this Sector In-Depth.)

 

 

 

Coming next week: The Volume to Value Paradox featuring Nate Kaufman, Marian Jennings and Dan Grauman. These experts discuss their perspectives of moving from volume to value, the pitfalls to avoid, how to involve physicians, the impact of consolidation and scale on value and the overall challenges of inserting value into the reimbursement formula.

 

 

For a complete list of iProtean courses, click here.

 

 

For more information about iProtean, click here.