Despite the still-slow-to-recover economy and other negative forces orbiting health care, credit ratings for nonprofit providers are expected to remain relatively stable in 2013, though not as rosy as the two years prior.


That's one of the key takeaways from Standard & Poor's recently released assessment of the nonprofit health care sector. But the rating agency expects the operating environment to grow increasingly challenging this year thanks to high levels of uninsured patients, decreasing reimbursement rates and patient volumes, and the fading glow of cost-cutting efforts in recent years.

Many hospitals have already trimmed the low-hanging fruit in their operations, and will need to move into the "next generation" of expense reduction, says Martin Arrick, managing director of S&P's U.S. nonprofit health care group. That could come in the form of improving processes and changing how health care is delivered, he says.

"They've had so much success curtailing costs that the question really is, can they keep doing it?" Arrick says. "Because the underlying costs keep going up and they need to keep producing the next round of cost savings, and that's the challenge."

All told, there aren't really any big surprises for providers in the report. The pace of mergers and acquisitions in the field is expected to remain strong, S&P's predicts, as providers scramble to find ways to continue broadening services and increasing collaboration. Unusual acquisitions and affiliations are happening more frequently than any other time this decade, including Catholics teaming up with non-Catholics and larger health systems working with for-profit partners to expand their networks.

Hospitals and health systems are expected to continue the trend of employing physicians, too, as they look to better coordinate care and gain incentives spelled out in health reform.

S&P's expects the revenue outlook for nonprofit hospitals to remain "constrained" in 2013 — with providers reporting smaller rate increases from private payers, patients possibly switching over to "less-lucrative" insurance products on the exchanges, and still-looming sequestration. Competition will stay fierce this year and beyond, S&P's predicts, with patient volumes shrinking from shifts toward less-invasive procedures, a focus on quality care and less readmissions, and federal government audits of hospitalizations.

Top priority for many providers in 2013 is getting ready for health reform. Arrick says he expects the next 12 months to be "relatively quiet" as hospitals prepare themselves for the uncertainties of 2014, when the individual insurance mandate kicks in. There could be an initial surge in patients and revenue, but lower payment rates, reduced use of health services and more revenue risk are expected to be the eventual norm after the dust settles, according to the report.

"Right now, the industry is relatively stable in terms of what's going on. Everybody is sort of holding their breath waiting for 2014," he says. "The big deal is next year and the health care insurance mandate and do exchanges get set up and everything around reform. Twenty-thirteen is a quiet year that will be defined by preparation and getting ready for 2014."