Hospitals Enjoy Rebound from 9Os Crises

While most of the U.S. economy spent the first quarter struggling to avoid a recession, hospital financial managers were recording what they – and investors – hope are the first signs of a broad turnaround in the embattled sector’s fortunes.
Analysts say there are a number of reasons for the optimism, citing everything from increasing demand among aging baby boomers to indications that the federal government appears to be done slashing the Medicare budget.

The first good news reached the market on April 4, when Tenet Healthcare, the nation’s second-largest for-profit hospital chain, reported strong earnings of 60 cents per share, up 25% from the same period a year ago.

More importantly, the firm said the growth had been fueled by strong admissions among middle-aged patients. If continued, the trend could indicate the dawning of a new golden era for health-care providers, with demand for their services surging as the nation grows older.

Sector analysts will be watching closely this week as several additional chains report their first-quarter results, including HCA-Healthcare Corp., the nation’s largest, which is scheduled to release its earnings report today (April 23).

Washington: No Longer the Enemy
While most industry participants can recite a laundry list of problems that have bedeviled the industry in recent years – as well as company-specific issues like the federal investigation into HCA’s Medicare billing practices that sparked a massive reorganization at the company – it is more than a coincidence that the waters began to boil soon after the federal Balanced Budget Act of 1997 became law.

When adopted, the bill was expected to trim about $100 billion from the federal Medicare budget over a five-year period. But lawmakers actually cut much deeper. Two years later, the reductions were estimated at twice that.

But now that the federal budget has begun showing surpluses, the threat of further cuts seems to be receding.
Industry participants welcomed President George W. Bush’s first budget earlier this month, noting that it marked the first time in 20 years that the White House has not proposed cutting Medicare payments to health care providers.

“We appreciate your willingness to refrain from proposing additional cuts to a program that, since its inception, has ensured that America’s seniors have access to high quality, affordable health care,” the American Hospital Association, which represents the nation’s independent nonprofit hospitals, said in a letter to Bush on April 9.

Last year, Congress and the Clinton administration even restored about $35 billion to the program.
Mimi Park, an assistant vice president in the nonprofit health care group at bond ratings giant Moody’s Investors Service, said that since the restoration is a small percentage of the original cut, most of the hospital officials she talks to are not counting on the money to meet their budget targets. However, she said they are welcoming the broader trend of stability in federal funding.

Nonprofits Gain, Too
In the nonprofit sector, analysts remain cautious, but say the news definitely appears to be more positive than in the last few years, when bond rating downgrades far outpaced upgrades.
“In 2000, Moody’s downgraded 56 nonprofit hospital systems while upgrading only a dozen,” Park said last week. This continued a trend that started in 1998, when the number of downgrades skyrocketed to 56, compared with less than 20 in 1997.

Park said that while the agency is not forecasting how many rating changes it will deal out this year, analysts there do anticipate a much smaller gap between the number of upgrades and downgrades, and say the industry’s overall performance appears to be stabilizing.

In addition to the federal landscape, Park attributed the improving credit landscape to more focused management.
“Hospitals are refocusing on their core operations, not mergers or joint ventures, or acquisitions,” Park said. “In addition, a lot of the transactions that took place in the late 1990s are maturing and all of the benefits that people said would come out of the mergers and joint ventures are starting to come to fruition now, after some initial integration difficulties have been worked out.”

Challenges Remain
Observers said the industry’s leaders will still need to juggle a number of issues to continue to improve their performance in the coming years.

On the cost side of the ledger, a nationwide nursing shortage has made staffing tricky and is already applying pressure for wage hikes. In an effort to help spur the supply of trained nurses, the AHA in its letter to Bush protested a decision by the administration to cut funding to a health care worker training program from $353 million to $140 million.

Meanwhile, on the revenue side, managed care companies continue to dominate the insurance landscape, and are not letting up in their demands for lower prices.

But overall, hospital managers are confident that with the crisis atmosphere lifted, they will be able to take a more deliberate approach to those issues – and voice optimism that the increased stability will attract a new generation of young managers to help them.

April 23, 2001
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