Morgan Stanley Warns of Momentum In Hospital Closings, “they are getting eaten alive”
While the stock market could indeed be in the most extended bull market in history, there are new, troubling signs that the real economy is faltering.
A new report has sounded the alarm about the pace of hospital closures across the country. It says there are several factors pressuring margins at hospitals that are contributing to the accelerating rate of closures, particularly in rural communities.
The American Hospital Association (AHA) conducts an annual survey of hospitals in the United States. The data shows hospitals have been closing at a rate of about 30 per annum.
Bloomberg spoke with Morgan Stanley analysts led by Vikram Malhotra, who examined data from roughly 6,000 US private and public hospitals and determined eight percent are at risk of closing; another 10 percent are considered extremely “weak.” Malhotra defined weak hospitals based on criteria for margins for earnings before interest and other items, occupancy and revenue. The “at risk” group was defined by capital expenditures and efficiency, among others.
“The risks are coming following years of mergers and acquisitions. The most recent deal saw Apollo Global Management LLC swallowing rural hospital chain LifePoint Health Inc. for $5.6 billion last month. Apollo declined to comment on the deal; LifePoint has until Aug. 22 to solicit other offers. Consolidation among other health-care players, such as CVS’s planned takeover of insurer Aetna Inc., could also pressure hospitals as payers push patients toward outpatient services.
There are already a lot of hospitals with high negative margins, consultancy Veda Partners health care policy analyst Spencer Perlman said, and that’s going to become unsustainable. Rural hospitals with a smaller footprint may have less room to negotiate rates with managed care companies and are often hobbled by more older and poorer patients,” said Bloomberg.
Infographic: Rural Hospital Closures Since 2010
There have been 83 rural hospital closures since 2010 and 125 since 2005, according to a new infographic by Stroudwater. The infographic breaks down the hospitals’ Medicare payment type, location, whether or not the hospitals are located in a Medicaid expansion state and the closure year (Source/ Melanie Matthews)
Bloomberg Intelligence analyst Jason McGorman said margin compression is also occurring as technological improvements allow patients to get more surgeries and imaging done outside of the hospital.
They “are getting eaten alive from these market trends,” Perlman cautioned.
“Future M&A options could be too late — buyers may hesitate as debt-laden operators like Community Health Systems Inc. and Tenet Healthcare Corp. focus on selling underperforming sites to reduce leverage,” Morgan Stanley’s Zachary Sopcak said.
Some facilities are restructuring as outpatient emergency clinics with free-standing emergency departments. “Microhospitals,” or facilities with ten beds or less, seems to be gaining a foothold across the country. They have been springing up as of late in multiple states, including Texas, Colorado, Nevada, and Arizona. Dignity Health, a health system with facilities in Nevada, Arizona, and California, is also considering the possibility of testing the model in California, Kaiser Health News reports.
As for the incoming wave of hospital closures that Morgan Stanley expects to hit in the near term, well, it is more bad news for rural America that seems to have been left out of the “greatest economy ever.”