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© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
2
Generally, rating agencies continue to have a negative outlook for the U.S. Not-for-Profit Healthcare sector.
Slow economic recovery
Ongoing revenue pressures
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
3
U.S. Quarterly Unemployment Rate
Dec
200
8
Mar
200
9
Jun
2009
Sep
200
9
Dec
200
9
Mar
201
0
Jun
2010
Sep
201
0
Dec
201
0
Mar
201
1
6.9
8.6
9.59.8 10
9.7 9.5 9.6 9.48.8
% U
nem
plo
yed
Source: United Status Bureau of Labor Statistics
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
4
Slow Economic Growth Adds Pressure to Volume and Payer Mix Measures
Patients defer elective healthcare services
Rising charity care and bad debt expense
Budget pressures at federal and state levels impacting Medicare and Medicaid reimbursement rates
Unfavorable changes in payer mix away from commercial payers
Increased reimbursement pressures across all payers
Financial pressures and decreasing membership at health insurers
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
5
Declining Medicare Reimbursement Rates
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2.0
0.0
0.5
1.0
3.5
2.75
3.0
3.53.35
3.73.5
3.3
3.6
2.0
0.0
Payment increase
% I
ncr
ease
Source: Centers for Medicare and Medicaid Services
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
6
Hospital Revenues Threatened with Rate Reductions
Medicare payment rates declined for first time since 1998
Major hospital revenue sources under pressure
Medicaid rates at risk due to state budget deficits and expiring stimulus funds
Revenue Source % Revenue Factors
Medicare 43% RAC reviews, medical necessity, Medicare trust solvency
Medicaid 12% State budget gaps, expiring stimulus
Private insurance 43% Industry consolidation, membership losses
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
7
Revenue Growth Declining – Performance Sustained by Cutting Expense Growth
2006 2007 2008 20095.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
7.7
7.5
7.8
5.7
7.4
7.17.2
6.3
Total operating revenue Total operating expenses
Gro
wth
Rat
e %
Source: Moody’s Not-for-Profit Healthcare Medians for 2009
%
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
8
Expense Management will Likely Become More Difficult
Many systems have already done much to contain cost in areas of wages and supply chain
Other areas of anticipated increased expense:
– Pension expense due to declining interest rates
– Interest expense reflecting higher cost from shift to fixed rate bonds
– Bad debt expense
– Physician related costs due to increased alignment strategies
– IT expense of new systems to satisfy “meaningful use” requirements
– Strategic expense related to considerations of Accountable Care Organizations
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
9
LOC Expirations/Renewals
04 05 06 07 08 09 10 11 12 13 14 15
1,130
1,8421,520
1,1411,779 1,951
4,372
14,419
7,110
5,695
827253
($ in millions)
Source: Citigroup
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
10
Balance Sheets Retain a Number of Heightened Risks
Bank LOC renewal risk
Pension obligations
Exposure to non-cancelable operating leases
Negative valuation of swap portfolios
Increased capital spending funded with cash reserves
Changing views on “quality” of days cash metrics
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
11
Many Uncertainties Remain Regarding Healthcare Reform
Risks surrounding the legislation itself (additional management distraction or possible missed opportunities)
Legal challenges to the legislation and constitutionality
Many questions remain:
– How will it be implemented?
– How will compliance be defined?
– How should organizations proceed?
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
12
Positive Factors for the Not-for-Profit Healthcare Sector
Strong management teams respond well to challenges
Strong liquidity and stable investment returns
Provider fees in many states create short-term relief from Medicaid pressures
Generally stronger balance sheets emerging even in challenging environment
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20637SEA
13
Factors Contributing to Greater Consolidation Within Healthcare
Increased need for capital relating to plant modernization and IT systems
Greater limitations on access to capital due to wider credit spreads and more expensive bank liquidity
Cost of compliance with Medicare audits and new requirements under health care reform
Increased reimbursement pressures across all payers
Large unfunded pension liabilities
Possibility that benefits of tax-exemption will further diminish
Benefits of economies of scale, including increased bargaining power with suppliers, payers, and labor