The outlook for the U.S. hospital sector will remain negative well into 2010, based on my reading of credit rating reports from Fitch, Moody’s and Standard & Poors.

Hospitals are dealing with the recession adopting a broad and deep range of strategies, inventoried in a comprehensive survey issued by the Healthcare Financial Management Association (HFMA), How Hospitals Are Combating the Financial Downturn.

One hat I wear in my work-life is as a health economist; sometimes, clients in the health arena engage me as an economist looking at the macroeconomy’s impact on the health microeconomy. One such client engagement found me absorbing credit rating agencies’ reports on the hospital sector over the past few weeks (among other topical areas). Here’s the logic trail which underlines the assertion that introduces this post: that the hospital outlook (both not-for-profit and for-) is fiscally bleak.

Several factors began to converge in 2008 to lead the hospital sector into this bleak short-term forecast. Employers had already begun to shift health costs onto enrollees and families, and the retirement health benefit started to erode a couple of years ago. Consumers began to self-ration care — first, elective and self-driven health choices beginning around 2006, then co-payments for prescription drugs moved from $10 to $20 or $25 (and higher). Double-digit percentages of Americans postponed physician visits and recommended tests.

Employers’ downturn in profits has forced (and continues to compel) companies to layoff workers. The rise in unemployment exacerbates the self-rationing trends as unemployment portends rising levels of uninsured people. Too many of the newly-uninsured can’t afford COBRA payments, which often eat up more than 100% of the monthly unemployment payment.

An increasing number of people who are admitted into hospitals are discharged without the means to pay their bills. Hospitals’ payer mix was deteriorating before the fourth quarter of 2008: hospitals’ increasing levels uncompensated care and patient bad debt are mounting.

The backdrop to this is the liquidity crisis in banking: hospitals’ access to capital is eroding. Thus, hospital management has renewed emphasis on operating margins: C-level execs are firmly focusing on operations and cost control.

Further complicating the lack of access to capital is hospitals’ dwindling endowments and charitable contributions. Coupled with growing investment losses due to the stock market’s sad performance, this recession has severely weakened hospitals’ ability to undertake many of the capital spending projects they had planned.
The ratings agencies predict that the number of hospital downgrades will exceed upgrades for the next 18-24 months.

Health Populi’s Hot Points: It’s a tough job now, to be a hospital CEO, COO, and CFO. How to deal with this tough financial environment? The rating agencies are hopeful that institutions can carve out strategic positions for themselves. With surgical precision, hospitals can target new services and technologies where they can build on existing programs, and where fiscally possible and prudent. Hospitals can link up with stakeholders in their local communities — employers, consumer and patient groups, retail, food chains, and of course, physicians — to play the increasingly relevant role they have to play in the public’s health and well-being in their markets.

Hospitals are always very important local employers, too, so banding with employees as community stewards is a strategic linchpin in the multi-pronged strategy to muddle through this recession. The goal: to emerge out of the recession as a strong institution 12, 18 or 24 months from now. While there will be some increased $268 million of government funding for disproportionate-share hospitals, institutions should also think creatively about how to position themselves in their communities to grow the top-line while tightly managing costs without sacrificing quality care.