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From Health Law Daily, October 23, 2013

Health reform helps fuel hospital drive to consolidation: Moody’s

By Paul Clark

For-profit hospitals will continue a strategy of consolidation into larger entities as well as diversification into care provided in non-hospital settings in reaction to changes in the health care marketplace brought about by the Patient Protection and Affordable Care Act (PPACA) (P.L. 111-148), according to a report from Moody’s prepared by lead analyst the Dean Diaz.

Consolidation. PPACA offers at least one significant financial benefit to hospitals, but also a few changes that will put downward pressure on revenues, according to Moody’s. Because the health reform law expands the number of Americans with health insurance, either through the expansion of Medicaid eligibility in some states or an increase in the number of people with private insurance purchased through a health insurance exchange or marketplace, hospitals are likely to see declining levels of bad debt attributed to uninsured people who receive hospital services. Because bad debt will likely decline (which will improve the bottom lines for some hospitals), the federal government under PPACA is also reducing disproportionate share hospital (DSH) payments. An increasing number of insured patients, according to Moody’s, may offset the revenue hit attributed to lower DSH payments, penalties for high readmission rates for patients, and overall declining patient volumes.

Still, revenue uncertainties attributed to changes in reimbursement will help fuel further consolidation, according to the Moody’s report, because “increased scale provides [for-profit hospital] with a number of benefits, including the ability to leverage administrative functions and investments in infrastructure and to pool purchasing and negotiating power with suppliers and payors, respectively.” Three areas where consolidation creates efficiencies that will help reduce overall costs are billing, collections and volume purchasing.

Diversification. Moody’s notes that because the reform law, changes in Medicare and Medicaid reimbursement, and other changes in the hospital market will continue to focus on reducing inpatient spending, hospitals will seek other revenue streams. The report notes, “we expect hospitals to continue to invest in outpatient settings, including ambulatory surgery centers, urgent care centers and clinics, diagnostic and imaging centers and physician practices.” Investing in non-hospital entities better prepare hospital systems to operate in an environment of new payments systems, such as accountable care organizations and bundled payments, which are focuses of the health reform law.

Moody’s also sees a move towards “for-profit hospital companies building insurance-like capabilities that would allow for the management of patient populations and the assumption of risk for the cost of patient care.” While diversifying into the health insurance arena provides hospital systems with another revenue stream, Moody’s warns that this move could “increase volatility in both revenue and cash flows and lower margins.”

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