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The Dose - JK Wall

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Health Care & Life Sciences / Life Science & Biotech

Obamacare, HIP 2.0 goosing hospital profits—for now

August 31, 2015

Community Health Network continued to surprise even itself with more strong results in the second quarter.

The Indianapolis-based hospital system’s results were boosted by the expanded Healthy Indiana Program, known as HIP 2.0, which has used money from Obamacare to cover 275,000 more Hoosiers this year, as well as by higher enrollment in Obamacare health plans.

More paying customers helped Community pull in $47 million in profits from its operations during the three months ended June 30, according to a recent report to bondholders. That was well above the $29.8 million that Community leaders expected to earn—the second quarter in a row this year that Community’s profits have soared above expectations.

The same thing is happening at not-for-profit hospitals around the country, reported Moody’s Investors Service, in an Aug. 26 research note, as the nationwide uninsured rate has fallen to an unprecedented low of 11.4 percent, according to a Gallup survey.

Moody’s raised its outlook on not-for-profit hospitals’ bonds, saying growth in the cash produced by the hospitals’ operations was higher than at any time in the past decade.

“Operating cash flow growth is at a multi-year high following several years of little to no growth. Operating cash flow is growing amid greater insurance coverage, good patient volume growth and strong expense controls,” wrote Moody’s analyst Daniel Steingart.

But don’t expect the good times to roll on forever, warned Steingart. He expects the growth in cash to slow down soon, since the rise in new customers funded by Obamacare will reach a plateau.

“Recent quarters were helped by factors that are unlikely to repeat,” Steingart wrote. “Reductions in the uninsured rate gained momentum throughout 2014 and into the first quarter of 2015, contributing to patient volume growth, but growth in the number of insured people will taper. Late 2014 and early 2015 patient volumes were also positively affected by a heavy flu season due to a less effective flu vaccine.”

Community may already be seeing that happening. While its operating profits were slightly higher in the second quarter of the year than the first, the pace of growth in patient visits slowed a bit.

For example, Community’s inpatient admissions rose 8.4 percent in the first quarter, but when Community reported results for the first half of 2015, inpatient admissions were up only 4.3 percent. Community did not break-out patient volume stats for the second quarter alone.

Community’s profits from operations were also lower than in the second quarter last year, when they hit $65.8 million, although that was due entirely to a $31.1 million surge in salaries and benefits.

Even so, Community’s business remained in growth mode across the board, pushing Community's second-quarter revenue up by 1.7 percent to nearly $506 million.

Inpatient admissions rose 4.3 percent in the first six months of the year, with lucrative inpatient surgeries up 5.3 percent.

Outpatient visits surged 9 percent during the first half of the year, with outpatient surgeries ticking up 1.4 percent.

Physician work, measured by something called relative value units, spiked 13 percent. And imaging scans were up by 9.3 percent.

Community also enjoyed another big drop in unpaid bills. Its bad debt as a percentage of patient revenue fell to 3.3 percent in the first half of the year, compared with 4.4 percent in the first half of 2014 and 5.7 percent in the first half of 2013.

That decline over the past two years represents more than $20 million in extra revenue, in just the first half of the year.

Earlier this month, Indiana University Health also reported a sharp decline in unpaid bills due primarily to the HIP 2.0 expansion.

Meanwhile, the percentage of Community’s revenue coming from uninsured patients dropped to 5.1 percent on June 30, down from 6.1 percent at the same point last year and 6.7 percent at this time in 2013.

“The improvement in payor [mix] is driven by more patients becoming covered by insurance products including the Anthem Exchange products as well as HIP 2.0,” Community’s leaders wrote in their report to bondholders.

The Anthem Exchange products refer to the health insurance policies Indianapolis-based Anthem Blue Cross and Blue Shield sells on the Obamacare exchange. Anthem has reported that it has more than 100,000 members using those health plans now.

Anthem accounts for 18.4 percent of all of Community’s revenue, second only to the federal Medicare program, which accounts for 44.1 percent of revenue.

Longer-term, hospitals still face a host of financial challenges, noted Moody’s Steingart. They face competition from low-cost competitors, such as CVS’ MinuteClinics. They face slower growth in Medicare’s annual increases in reimbursement rates, as well Medicare’s push into flat-rate payments for joint replacement surgeries and payments that hinge on how well hospitals keep a population of patients. Also, Obamacare’s “Cadillac tax” and other pressures are causing more employers to expose their workers to much more of the cost of health care via high-deductible plans.

And then, of course, there could be pressure from the consolidation of health isnures. Mergers of Anthem and Cigna Corp, as well as Aetna Inc. and Humana Inc., are pending.

“The not-for-profit and public healthcare sector industry faces long-term challenges stemming from who pays for care, how providers are reimbursed, and changes in patient behavior. These risks may weigh on profitability and growth,” Steingart says.
 

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