S&P: Health Care Law’s Hospital Payment Provisions Could Put Ratings at Risk

CHICAGO — Provisions in the new federal health care law that aim to change the way hospitals are paid for their services could pose risks to nonprofit providers, Standard & Poor’s said in a report released yesterday.

It’s the latest in a series of reports from credit analysts warning that nonprofit providers — which make up 85% of all acute-care facilities in the U.S. — will face new pressures under the law. Moody’s Investors Service and Fitch Ratings have also said the reform could pose long-term challenges to the sector.

A decline in Medicare and Medicaid reimbursements and likely reimbursement declines from commercial insurers facing their own challenges are considered among the law’s chief drawbacks for hospitals.

In its new report, Standard & Poor’s warns that providers will also have to adjust to entirely new ways of delivering and getting paid for care. The changes could mean a drop in volume and revenue, translating into scaled-back capital projects for many providers.

“All of the various measures in the law aggregate to a movement away from the traditional fee-for-service type of payment model that’s dominated health care for decades now,” said Liz Sweeney, the Standard & Poor’s analyst who wrote “Health Care Reform Could Increase Credit Risk for U.S. Not-For-Profit Providers.”

“I wouldn’t call it a revolution, but there are many little provisions in there that go after the idea that [the federal government] no longer wants to pay for every single little procedure on a per-unit basis.”

The bill’s most publicized aspect is the reform of the insurance industry, which includes a mandate that all Americans be insured by 2014 and that insurance companies can no longer deny coverage for pre-existing conditions.

But at least half of the 2,000-page bill is devoted to reforms of the industry’s delivery and payment system, Sweeney said. “In many ways, we think this part of the bill represents more significant reform,” she wrote in the report.

If successful, the law would mean a shift toward new payment models. The government will tap a number of providers and states over the next few years to launch pilot and demonstration programs to assess the impact of the new provisions.

Chief among the new payment models are so-called bundling, or one payment for one episode of care; reimbursements that are based on the quality of care; and so-called capitation, a fixed, annual per-patient payment.

“While bearing in mind that most of these programs are fairly incremental and will take a long time to implement, the shift away from fee-for-service shifts risks to providers,” Sweeney said.

Bundling, for example, would require hospitals to share payments with all of a patient’s caregivers — such as physicians, physical therapists, homecare workers, etc. — and would require hospitals to amass detailed and accurate information about non-hospital-related cost of care.

The new law does not specify which caregiver would manage the bundling method, but hospitals would be the most natural choice, said Standard & Poor’s.

“Just because of their size, the hospitals will wind up shouldering most of the risks,” Sweeney said.

The new payment models, coupled with other provisions under the law, could mean a decline in volume and revenue.

“Most hospitals are big, fixed, high-cost places that are designed to churn out volume,” Sweeney said. “As the delivery system moves away from paying for everything, you’ll still have hospitals with big, fixed costs that you need to cover.”

Despite the challenges ahead, Sweeney said that most providers seem eager to embrace “a new paradigm.”

Like providers, state fiscal officials, and other credit analysts, Standard & Poor’s said the law’s size, complexity, and lack of details makes the future hard to predict.

“The bill addresses a lot of different aspects of health care payment and delivery,” Sweeney said. “But a lot of it is left up to the secretary of health and human services to implement, which makes it very difficult to tell how certain aspects of the bill will ultimately impact providers.”

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