ACA Repeal Would Squeeze For-Profit Hospitals

By Margaret Dick Tocknell, for HealthLeaders Media

If the Affordable Care Act is fully or partially nullified by the US Supreme Court, for-profit hospital operators will face a credit-negative situation as costs increase and profit margins shrink, according to a special comment report from Moody’s Investors Service.

That could be detrimental to the credit position of for-profit, acute-care hospital operators such as Community Health Systems, HCA, and Tenet Healthcare Corp., which could find themselves with less cash flow available to reduce debt.

“If the law is fully or partially repealed, for-profit hospital operators’ costs of treating patients unable to pay their bills would rise, and limit operators’ revenue growth and profit margins, and constrain cash flow,” explains Dean Diaz, a Moody’s vice president-senior credit officer and author of the report. “Bad debt expense already averages over 10% of revenue of our rated for-profit hospital operators.”

In terms of the interest of for-profit hospital operators the complete elimination of the entire ACA is slightly more preferable than simply severing the individual mandate from the ACA, which would put more pressure on for-profit hospital operators. “Without the mandate the number of uninsured patients will likely expand and there won’t be a large enough pool of insured patients to help offset those treatment costs,” Diaz told HealthLeaders Media.

According to the report “many parts of the law are tied to the assumption that the individual mandate will lead to an increase in the number of individuals with health insurance.” Removing only the mandate creates questions about how some remaining provisions of the healthcare law will affect for-profit hospital operators.

The report notes that for-profit hospital operators have already begun to pay for healthcare reform through reductions in annual Medicare market basket increases and the healthcare law itself schedules additional reductions, such as cuts in disproportionate share payments and productivity adjustments. The reductions are among the hospital industry’s concessions to help cover the cost of healthcare reform initiatives.

Diaz explains that if the healthcare law remains intact without the individual mandate then the cuts would continue to be implemented, offsetting a portion of the growth in Medicare reimbursement expected through annual market basket increases.

“Given our expectation that the elimination of the individual mandate would increase bad debt expense, this development could be a double hit to the for-profit hospital operators,” says the report.

If the healthcare law is repealed, Diaz says the cuts wouldn’t be implemented and for-profit hospital operators could see full market basket increases again. However, he expects any increase in reimbursement rates to be offset by the negative effect of the continued rise in uncompensated care costs on for-profit hospital operators’ profit margins.

It’s also unclear whether the for-profit hospital operators will see a return on the investments and strategies related to healthcare reform that they have put in place. Diaz says the efficiencies related to electronic medical records and enhanced clinical systems should translate indirectly into financial gains.

While the investments for-profit hospital operators are making now could reduce their profit margins in the next year or two, the report concludes that the “increased spending will benefit them in the longer term and provide competitive advantages over other hospitals.”

Diaz is less sure about the benefits of employing physicians and acquiring physician groups. Those investments, he says, are motivated by the creation of accountable care organizations and new payment models such as bundled payments and “may take a longer time” to produce a return. Still, the physician practices will “continue to provide the for-profit hospital operators a means of maintaining patient volumes within their systems even if the healthcare law is repealed,” says the report.

HealthLeaders Media released in January a survey of hospital administrators that revealed that 59% of the respondents have a high interest in acquiring physician groups and 56% of healthcare leaders have a specific team dedicated to hospital-physician practice acquisition.

Despite its shortcomings, the demise of the full ACA “would create an even greater sense of uncertainty” for for-profit operators because healthcare reform would once again “be open to any number of proposals,” says the report.