With health care reform and the passage of the Affordable Care Act, the industry faces increasing uncertainty over how an organization will be able to manage with less robust revenue and accelerating consolidation, according to a new study by National Public Finance Guarantee Corp.
These factors pose challenges when addressing the long-term creditworthiness of the nonprofit health care sector, because hospitals are stuck between bad debt expenses and liquidity stress that came from the past recession, and conflicting court cases over health care reform in the coming years.
The study profiled the top 20 credits in NPFG’s health care portfolio based on gross exposure as of Dec. 31. The top 20 credits represent $4.7 billion, or 35.9% of the bond insurer’s portfolio. The total portfolio included 224 insured hospital and health system credits, totaling $13.2 billion of gross exposure as of Dec. 31.
When reviewing credit fundamentals, one of the major challenges facing the industry is a decrease in the revenue base resulting from pressure on Medicare and Medicaid payments.
The Medical Board of Trustees reported that the largest amount of projected savings in the Medicare Hospital Insurance Trust Fund comes from lower annual increases in the prices Medicare pays for services by hospitals and other providers. Payment increases will be reduced by about 1.1% per year, meaning those costs will be passed on to providers and hospitals.
Revenues are also being affected by Medicaid, which, unlike the federal government’s Medicare program, is financed to a significant extent by individual states.
“For states, the challenges from changes in Medicaid are substantial and these pressures are likely to affect hospital reimbursement,” wrote managing director Karleen Strayer. She added that states, while operating on tight budgets, will face challenges of administratively implementing the Medicaid expansion, setting up health insurance exchanges, and transitioning to new income-eligibility methodologies.
The recession also led to the highest average Medicaid state spending growth in eight years. “Medicaid already accounts for roughly 22% of the average state budget and is the fastest growing item,” she wrote.
Due to regulatory reform, there is an expected increase in Medicaid population. NPFG expects that hospitals that serve a high percentage of low-income individuals should prepare for lower disproportionate share hospital payments as the new health reform incorporates substantial reductions to these repayments. The insurer remains “particularly cautious” when reviewing these types of institutions and will review the impact on an organization that serves this population. NPFG is also reviewing the effects of consolidation in the industry, as mergers and acquisitions have the potential to affect an organization.
“The challenges presented by reduced reimbursement, physician integration strategies, capital requirements, and IT initiatives combined with the advantages of scale provide powerful incentives to join forces,” Strayer wrote.
Consolidation should help the market, and NPFG thinks it can provide competitive advantage. Smaller hospitals and systems can still succeed, but the challenges are greater, the report said.
With the passage of health care reform, there is also a focus on quality, not quantity. Strayer said one example of this would be to look at how hospitals work with physicians to make sure there is reduced unnecessary readmission as opposed to looking at just the volume of patients treated.
Strayer added: “The ability of an organization to appropriately address these critical areas will be strong determinants of success and survival in the not-for-profit health care universe.”
