Health Care Reform Will Likely Lead to Less Revenue: Moody’s

The new federal health care law will likely mean less revenue for nonprofit hospitals in the long run, Moody’s Investors Service warned in a report out this week.

Analysts at Standard & Poor’s and Fitch Ratings have also warned that the sweeping reforms could pose long-term challenges to the sector.

The measure’s most high-profile change — making insurance mandatory after 2014 — is generally expected to benefit hospitals, particularly those that struggle now with high levels of bad debt and charity care.

But revenue from more insured payers will likely be offset by reductions in Medicare and Medicaid spending, tougher negotiations with insurance companies, more federal oversight, and mandated operational efficiencies, analysts said.

Nonprofit hospitals — which operate more than 85% of all acute-care facilities in the U.S. — would likely not experience much of an impact for the next few years.

In 2014, however, when key provisions begin to kick in, facilities could see falling revenue as they are forced to implement operating efficiencies and grapple with cuts in uncompensated care costs, analysts said.

“While the most efficiently operated health systems will take advantage of health care reform to leverage economies of scale, many not-for-profit hospitals, especially single-site and small hospital systems, may struggle,” Moody’s analysts wrote in “Long-Term Credit Challenges of Healthcare Reform Outweigh Benefits for Not-for-Profit Hospitals.”

“Industry consolidation resulting in bigger health systems with greater access to credit — already encouraged by current market forces — likely will increase further under health care reform,” Moody’s said.

Tougher negotiations with insurers, increased audit costs tied to more federal oversight, and the expectation that pharmaceutical companies and medical device makers will pass on fees to customers also pose challenges.

At least three key provisions in the new law are expected to cut Medicare reimbursements. Chief among them is a reduction in annual market basket updates, a provision that Moody’s estimates will mean $150 billion of reduced reimbursements to hospitals over 10 years. Medicare cuts could also result from a new bundled payment pilot program — meaning one payment for one episode of care — and a so-called value-based physician payment program.

On the Medicaid side, the new law includes a provision requiring a reduction in Medicaid disproportionate share funding by $14 billion through 2019. The federal Medicaid disproportionate-share funding program provides money to states to subsidize hospitals for the unreimbursed care they provide to uninsured and Medicaid patients. The cuts are expected to follow the increase in insured patients.

“It will be years before the full consequences of reform are felt by not-for-profit hospitals,” Moody’s said. “While reform presents significant benefits to hospitals, longer-term reform is a net negative for not-for-profit hospitals, particularly many standalone community hospitals and smaller local systems that will be challenged by future payer reimbursement constraints and demands to operate more efficiently.”

Standard & Poor’s, in a March report, noted that an increase in the number of patients could pressure hospitals’ operations.

“How much not-for-profit hospitals benefit from this new law could well depend on the balance between revenue lost, largely from Medicare, versus revenue gained from the newly insured,” analysts wrote.

“Another issue that could significantly affect hospitals is the potential for a surge in demand as the newly insured people seek out services that they previously deferred. Although this is generally likely to be positive for hospitals, it raises issues of staffing and space, which they will have to address.”

Fitch said it sees the legislation as primarily affecting the insurance sector, but that hospitals too will see a number of benefits and challenges. An expected rise in volume will likely be offset by cuts to Medicare and Medicaid as well as “penalties for adverse outcomes,” Fitch said.

Larger, well-managed systems will be better positioned to weather the unfolding changes, driving more consolidation throughout the industry, analysts agreed.

Analysts also agreed that the new federal measure is big and complex and will take years to affect the sector — and will likely come with a series of unintended benefits and drawbacks.

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