COLORADO SPRINGS -- Proposed national health-care reforms could weaken some hospital credits by curbing revenue growth, according to health-care officials attending a conference here.
John Goetz, vice president and assistant director of the Healthcare Ratings Group at Moody's Investors Service, said that national health reforms could have a "generally negative" impact on health-care bond ratings.
Goetz, speaking at a health-care finance conference sponsored by George K. Baum & Co., said the reforms most likely will cause a reduction in hospital revenue growth, which could lead to curtailed financial performance and reduced debt service coverage.
Under a managed competition reform plan, a proposal supported by the administration of President Bill Clinton, health-care providers would bid for the business of large employers and other groups.
The formation of purchasing and provider networks poses potential risks for health-care issuers, Goetz said. Those risks include abrupt shifts of market share, exclusion of hospitals from provider networks, and disruption of patient referral patterns, he said.
Goetz noted that the negative effects of reforms could be partly offset by several benefits, including an increase in insured benefits, heightened efficiency, and the formation of strong provider networks.
"It may not be all doom and gloom," Goetz said.
He added that the number of issuers affected by the anticipated reforms remains unclear because rural and sole community health-care issuers may not be part of a provider network system under a national managed competition plan. Goetz also pointed out that companies with many employees could be exempt from participating in national reforms.
Larry McAndrews, president and chief executive officer of the National Association of Children's Hospitals and Related Institutions Inc., said that reforms could lead to decreases in hospital revenues, which may limit an issuer's financial strength and its ability to issue bonds.
"If the hospital has not now [issued bonds] or does not now have it on the drawing board, it will become more difficult to get capital, period, because no matter how you cut it, cost containment will reduce margins," McAndrews said.
In the past decade, about $1.6 billion of bonds have been issued by independent children's hospitals, mostly to finance the construction of outpatient care facilities, McAndrews said.
He said the formation of large health-care purchasing networks that seek to control the number of patients going to higher cost facilities will challenge children's hospitals, academic institutions, and advanced-care facilities. The creation of children's hospital "look-alikes" may result in some shifting of patients, McAndrews said.
To survive in the increasingly competitive marketplace, an independent children's hospital should be located in an area with a population of 1 million or more McAndrews said. He said only large metropolitan areas will be able to support more than one high-quality pediatric institution.
Ronald McLaughlin, senior vice president and chief financial officer of Samaritan Health System in Phoenix, said the Phoenix metropolitan area, which has a population of about 1.5 million, has two pediatric facilities.
"We have two pediatric programs and we probably don't have the population base to support it. I think something is going to give there, but I don't know what," McLaughlin said.
Meanwhile, health-care officials said that hospital mergers are accelerating across the country primarily in reaction to health-care reforms on the state and national levels.
Nick Hilger, president and chief executive officer of the newly merged Swedish-Presbyterian/St. Luke's Healthcare System in Colorado, said many hospitals are considering mergers for a variety of reasons.
He cited the growth of managed care opportunities to provide a broad range of cost-efficient services and increased access to capital. He said mergers also help facilities improve management and influence government health policy.
Hilger said that institutions considering mergers should ensure that the combined entity serves a broad geographic region and provides a wide range of services. In addition, he said that both the medical and corporate staffs of the merged institutions should be compatible.
Both Swedish Medical Center and Presbyterian/St. Luke's are expected to complete their merger by the end of the month, making the combined systems the largest health-care provider in the Denver metropolitan area.
