Catching Up on Sector-in-Depth Reports: VBP and Pensions

Moody’s Investors Service recently released two of its Sector-in-Depth reports that may be of interest to our subscribers. One focuses on how quality-based reimbursement affects financial performance, and the second discusses hospitals’ issuing debt to fund pensions. Brief summaries appear below. The full reports will be published with our next course in January.

 

Financial Impact of Value-Based Payment

“As reimbursement moves away from fee-for-service to an emphasis on value and outcomes, a hospital’s ability to improve quality of care and the patient experience will increasingly impact its financial performance,” wrote Moody’s Investors Service analysts in their recent report.

 

These analysts reviewed CMS data and found, for example, that hospitals with stronger value-based payment and patient experience scores posted significantly higher operating cash flow margins. They also noted that large hospitals “do not necessarily have an advantage in a value-based reimbursement environment.” (Quality-Based Reimbursement Will Increasingly Impact Financial Performance, Moody’s Investors Service Sector-in-Depth, October 7, 2016)

 

A summary follows:

 

  • Above-average VBP and patient experience scores correspond to stronger financial performance. Hospitals with above-average value-based payment (VBP) scores in 2015 had a median operating cash flow margin of 11.7 percent, well above the 8.6 percent for below-average performers. The correlation will likely continue as government and commercial payers shift from fee- for-service to VBP, where the patient experience is a component.
  • Despite fewer resources, small hospitals have a higher percentage of above- average VBP scores than larger ones. Small hospitals are performing well in VBP scores, even as larger hospitals have advantages in their ability to treat more complex illnesses and a larger patient base.
  • Higher patient experience scores are correlated to newer facilities, or a lower age of plant. Investments that improve the patient experience and quality of care will become more important as consumer choice grows. Private patient rooms, comprehensive ambulatory centers and new technology will likely improve the patient experience.

 

Incentive to Issue Debt to Fund Pension Liabilities, But May Be Credit Negative

“Low borrowing costs and rising premiums owed to the federal government’s pension guarantee agency (Pension Benefit Guaranty Corporation, PBGC) provide growing incentive for not-for-profit hospitals to issue debt to fund pension liabilities,” wrote Moody’s analysts in a recent report.

 

This creates a new fixed obligation in lieu of the corresponding pension liability that would otherwise fluctuate over time. This can be negative for the hospital’s credit, especially if the assumptions used in justifying the issuance are aggressive. (Hospitals Increasingly Issuing Debt to Fund Pensions, Moody’s Investors Service Sector-in-Depth, October 17, 2016)

 

A summary of the report follows:

 

  • Rising PBGC premiums and low interest rates make it attractive to issue debt to fund pensions. Hospitals following Financial Accounting Standards Board (FASB) accounting (private, 501c3 hospitals) are most likely to issue debt as they are paying higher PBGC premiums on the unfunded pension liability and are recording growing liabilities due to falling discount rates.
  • Pension funding bonds solidify a fluctuating liability and create credit negative elements. As hospitals consider issuing bonds to fund a rising pension liability, they will need to make assumptions around future interest rates and other capital spending needs. Pension funding bonds have credit negative elements because by issuing debt a system assumes its assumptions around discount rates, investment returns and rising premiums will pan out. If the assumptions do not work out as planned the system ends up with hard debt that they have to pay and more unfunded liabilities than expected, which equates to future budget risk.
  • Issuers have other options to address large pension burdens. Hospitals can opt to close the plan to new employees, freeze accrual benefits to existing employees or make other changes that lower the projected benefit obligation.

 

(iProtean once again thanks Moody’s Investors Service for permission to quote liberally from its publications.)

 

 

 

iProtean subscribers, the advanced Finance course, Driving a Sustained Culture of Quality, What Works, What Doesn’t, featuring Larry McEvoy, M.D., and Stephen Beeson, M.D., is in your library. As always, Drs. McEvoy and Beeson take a cutting-edge view of the board’s role in overseeing quality—beyond the traditional processes and structures where boards customarily focus their oversight responsibilities.

 

 

For a complete list of iProtean courses, click here. www.iprotean.com/index.php/iprotean/onlineCourses/Available_courses

 

 

For more information about iProtean, click here. www.iprotean.com/index.php/iprotean/demo

 

Moody’s 2017 Outlook Projects Stability but Persistent Operating Pressures

Moody’s Investors Service 2017 Outlook for not-for-profit and public healthcare predicts stability over the next 12 to 18 months.

 

Its analysts base projections on 0 to 1 percent operating cash flow growth and solid patient volume and revenue growth. Technology and operational investments, however, will continue to bring pressure on hospitals and systems.

 

However, Moody’s analysts note mixed results from “any change in federal policy regarding Medicaid expansion and the Affordable Care Act without a well-defined replacement policy, with much near-term uncertainty.” (2017 Outlook – Volume and Revenue Growth Drive Stability, But Operating Pressures Persist, Moody’s Investors Service Outlook, December 5, 2016)

 

Detail appears below:

 

  • Operating cash flow will grow 0-1 percent over the next 12-18 months. Operating cash flow growth is moderating but remains positive after two years of extraordinary growth associated with Medicaid expansion under the Affordable Care Act. Top-line revenue growth is strong, but constrained reimbursement rate increases and rising costs will temper that growth. Operating cash flow growth recently peaked in fiscal 2015 when the sector experienced the one-time positive effects of individuals gaining insurance coverage for the first time and accessing healthcare services. Growth at those levels would be difficult to maintain.

 

  • Patient volume growth is stable at about 1 percent. With the percentage of the population that is uninsured leveling at around 11 percent over the last year, growth in healthcare utilization will be more modest in the future. However, the growth will be sufficient to drive continued top-line revenue growth of 3.5-4.5 percent.

 

  • Hospital affiliations can drive volume growth and will remain prevalent. The rapid pace of mergers, acquisitions and strategic partnerships reflects larger systems’ general expansion strategies to increase size and scale. The flurry of affiliations is also a response to market pressures, which include increased stress on reimbursements from governmental and commercial payers, and the threat of consolidation among insurance companies (which reduce hospitals’ pricing power).

 

  • Expenses are on the rise, compressing margins. Hospitals continue to juggle rising pharmaceutical costs, growing bad debt and additional salary/benefit expenses with growing employment and increased pension costs. Hospitals have been employing more physicians and acquiring physician practices in an effort to manage the transition to population health strategies, such as the introduction of value-based and risked-based models. Employing a greater number of physicians typically leads to lower profitability, and population health strategies require significant technological investment that can also drive down margins. In addition, drug costs continue to rise; high barriers to entry for pharmaceuticals are leading to significant price increases.

 

  • Bad debt is rising as expected. Healthcare exchange disruption and the increased exodus of insurers will contribute to higher bad debt and healthcare costs. After falling for several years as more patients gained insurance, bad debt is again on the rise, particularly in non-Medicaid expansion states. Rising co-pays and high deductibles for employer health plans are also driving increased costs and bad debt, regardless of whether a state expanded Medicaid. Insurance premiums have increased significantly for plans sold on the public exchanges due to the large losses that insurers have incurred in this market. A variety of reasons are driving these losses, including rule changes that removed a number of healthier individuals from the risk pool and the non-payment of risk-corridor funds owed to insurers (these payments were intended to protect insurers from excessive losses in the first three years of the exchange’s operation). These losses have resulted in the large national insurers exiting a number of markets and the closure of many money-losing non-profit insurance co-ops.

 

  • What could change the outlook. Analysts would consider changing the outlook to positive if they expected sustained operating cash flow growth above 4 percent over a 12-18 month period, after accounting for healthcare inflation. They note they would consider changing the outlook to negative if they expected weakening business conditions leading to flat or negative operating cash flow, after inflation. Any major regulatory changes or disruption of current policy could pressure the outlook.

 

(iProtean once again thanks Moody’s Investors Service for permission to quote liberally from its 2017 Outlook.)

 

 

 

iProtean subscribers, the advanced Finance course, Driving a Sustained Culture of Quality, What Works, What Doesn’t, featuring Larry McEvoy, M.D., and Stephen Beeson, M.D., is in your library. As always, Drs. McEvoy and Beeson take a cutting-edge view of the board’s role in overseeing quality—beyond the traditional processes and structures where boards customarily focus their oversight responsibilities.

 

 

For a complete list of iProtean courses, click here. www.iprotean.com/index.php/iprotean/onlineCourses/Available_courses

 

 

For more information about iProtean, click here. www.iprotean.com/index.php/iprotean/demo