Economic improvement in many markets, growth in the insured population under the Affordable Care Act (ACA), and management initiatives to boost volumes are converging to support improved performance in the for-profit hospital sector, according to Fitch Ratings. While secular headwinds to patient volumes are persistent, we believe that the influence of these factors is tapering since the industry has now been facing these pressures for several years.
The Fitch-rated group of for-profit hospital companies reported very strong growth in organic patient volumes in 3Q14, with same-hospital admissions up 0.7% and adjusted admissions up 3.5%. This is a sequential improvement from a good result in 2Q14 and the first quarter of positive growth in inpatient admissions since 4Q12. Fitch believes the hospital industry may post another two quarters of above-trend growth in volumes as the positive effects of the ACA gain a bit more momentum early in 2015.
Over the longer term, positive organic growth in inpatient admissions is probably not sustainable partly because of pressure by health insurers to reduce volumes of short-stay admissions and rates of hospital readmissions. However, Fitch thinks there is reason for optimism that the improved trend in outpatient volumes has legs since operational initiatives to capture these volumes will have a sustaining influence.
The ACA has not only been supportive of volume growth; an increase in the ranks of the insured is resulting in a lessened financial headwind from uncompensated care for uninsured patients. Versus the prior-year period, 3Q14 adjusted bad debt expense dropped by an average of 518bp across the Fitch-rated group to 21.5% of revenues. Although early evidence of the influence of the ACA on the industry is largely positive, it is difficult to project future effects since the ACA faces continued political opposition. Following midterm election victories for the GOP in 2014, it is unlikely that more states will opt into ACA's Medicaid expansion in the near term. Legal challenges also remain, most notably the pending the Supreme Court's review of the legality of tax subsidies for some customers of the health insurance exchanges.
The full report, "Hospitals' Credit Diagnosis: Favorable Factors Converge to Support Organic Growth," is available at www.fitchratings.com. The report provides a summary of the quarterly operating performance and credit metrics of companies in the for-profit hospital sector including detailed debt and organizational structure charts.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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