Fitch Ratings upgraded its 2020 outlook for U.S. not-for-profit hospitals and health systems from a negative outlook to stable.

The rating agency said in a Dec. 10 report that while the sector will continue to face challenges like a tough labor market and limited revenue increases from commercial payers, balance sheet measures are hitting levels "not seen since before the 2008 market crash, and have ... mitigated some of the operational pressures seen in the sector in recent years."

Fitch highlighted continued M&A in the hospital space as a 2020 trend, with providers' strategies being built on size and scale to gain footing in specific markets.

"Consolidation and alignment activity is expected to continue, with the largest provider health systems continuously adding smaller providers ... in their various markets," the report stated. "Although size and scale alone do not necessarily result in success, further consolidation is a logical outcome given current industry pressures."

Hospital consolidation and market concentration have been a consistent trend in the healthcare space.

The Health Care Cost Institute, a nonprofit healthcare organization, said in a September report that 72% of the 112 metro areas studied were considered highly concentrated in 2016, an increase of 5 percentage points between 2012 and 2016. While the authors of the report did not solely identify consolidation as a cause of market concentration, they said consolidation was a key driver.

The hospital industry says consolidation decreases costs and improves care. However, some economists claim the lack of competition actually increases healthcare costs and decreases the quality of care.

Fitch highlighted the growing presence of nontraditional healthcare companies in the industry as a disruptor to watch in 2020, particularly from tech companies.

"Non-traditional entrants include well-capitalized and innovative high-tech companies, with nearly unlimited funding, sophisticated and consumer-friendly distribution channels and data platforms that they will leverage to enhance and simplify the individual's experience with the healthcare delivery system," the report stated.

Moody's also ups 2020 outlook

Fitch's report came one day after Moody's Investors Service changed its 2020 outlook of the U.S. not-for-profit hospitals and public healthcare sector from negative to stable.

Moody's said in the Dec. 9 report that the change in outlook is due to a projected increase in operating cash flow, driven by stronger revenue growth. Operating cash flow for the industry is expected to grow by 2% to 3% in 2020, with a projected 4% to 5% increase in revenue, according to the report.

The rating agency said the revenue growth will primarily come from stronger commercial rates and higher Medicare reimbursement rates. Medicare rates in 2020 will increase by 3.1% for overall inpatient rates and 2.6% for overall outpatient rates, according to the report.

An increase in patient volumes will also add to revenue growth, but patient volume growth will be slower than in previous years, the report stated.

Moody's also highlighted continued M&A activity as a 2020 trend as systems look to increase in size and boost their revenue.

"The continued surge in M&A activity shows no signs of a slowdown in hospitals' bid to gain negotiating leverage with commercial insurers, achieve savings through economies of scale, and ensure a foothold in emerging offerings such as urgent care and telemedicine," the report stated.

The analysts said as insurers like Anthem Inc. continue to grow, negotiating hospital-friendly prices will be more difficult, forcing hospital systems to grow as well because commercial insurance reimbursement is more profitable than reimbursement from government programs like Medicare and Medicaid.

New price transparency rules from the Trump administration will have a varied impact on hospitals, according to the report. The new rules would require hospitals and insurers to make their privately negotiated prices public.

Some hospitals will be able to use this pricing information to attempt to negotiate higher reimbursement prices form insurers, but the analysts added that "it would not be a surprise if the information prompts insurers to pursue lower rates if competitors are paying less."

The rule for hospitals was finalized Nov. 15 and is set to take effect Jan. 1, 2021; however, it is facing a legal challenge from a coalition of hospital groups. A separate rule for insurers was proposed on the same date and is in the public comment period.