Supreme Court Ruling Good News for Nonprofit Hospitals

CHICAGO — The Supreme Court’s decision upholding the new federal health care law is the best outcome for nonprofit health care providers — and could mean a jump in hospital bond issuance — but the law also presents challenges for the sector.

The court’s affirmation of the Patient Protection and Affordable Care Act, President Obama’s $1 trillion, 10-year overhaul of the U.S. health care system, upholds key provisions for the sector: the mandate for individuals to buy health insurance and Medicaid expansion provisions.

It means a measure of stability for the hospital bond market and for providers who have spent the last two years preparing for the new law, market participants said in interviews after the historic ruling Thursday morning.

“Hospitals will benefit, and in particular anybody with large Medicaid volumes, like academic medical centers which are often de facto safety-net hospitals,” said Susannah Page, director of municipal bond research at Bank of America Merrill Lynch.

Noting that health care providers have struggled with falling volume over the past several years, Page said the new law should also help with that.

“There are people out there who have been avoiding health care services,” she said. “There’s been a real softness that will come back, at least in the beginning.”

Large safety-net hospitals that have struggled with non-paying patients over the last several years will benefit from the law despite scheduled cuts in the Medicaid Disproportionate Share Hospital program.

Officials in Cook County, Ill., for example, who run one of the nation’s largest public hospitals, applauded the decision and said the law’s Medicaid expansion could make a big dent in the health system’s annual budget shortfalls, most of which come from bad debt.

The ruling could also spark a jump in new-money issuance, as providers who have delayed capital spending now reconsider amid a favorable interest-rate market.

Hospital bond issuance has ticked slowly up throughout 2012 but remains significantly down compared to pre-2008 figures, according to Page.

Bank of America Merrill muni research strategist John Hallacy last week revised upward to $390 billion the bank’s estimate for overall municipal bond issuance in 2012.

Health care generally makes up around 10% of overall issuance, Page said. While $39 billion in 2012 might seem high — volume totaled $10.97 billion through the end of May — hospital bond issuance will still likely see a nice increase, Page said.

“I think the new money is going to come back the second half of the year,” she said.

For Moody’s Investors Service, which maintains a negative outlook on the sector, the court’s ruling is a “credit neutral” action for nonprofit hospitals. The new law itself, however, is considered to be negative for the sector, stemming mostly from its built-in Medicare and Medicaid cuts.

The new law will reduce Medicare spending by $150 billion over 10 years and cut Medicaid disproportionate sharing funding by another $14 billion, according to Moody’s analyst Mark Pascaris.

“Our view is that the reimbursement pressures that are embedded into the ACA are greater net than the positives,” he said.

Hospitals will also face reimbursement pressure from insurers. “Insurers will be under an elevated level of scrutiny and it will be that much more difficult to negotiate with them,” Pascaris said.

Reimbursement pressures could keep capital spending down over the long term, according to Moody’s analyst Lisa Goldstein. “Issuance has been lower the past couple years and hospitals can only put off capital spending for so long,” she said. “We do expect to see some modest increase in debt issuance, aided by a very low interest-rate environment.”

The new law’s emphasis on providing care in an outpatient setting — outside of a hospital — could make that an area of new capital needs, Goldstein added.

Like Moody’s, Fitch Ratings said the high court’s ruling Thursday will have little immediate impact on hospital credits. Unlike Moody’s, however, Fitch expects the new law to have overall positive implications for the sector, though reimbursement cuts and other provisions will offset some of the positive effects.

“Focus now shifts to the outcome of the November 2012 elections, and we expect the ACA will continue to face significant legislative challenges,” Fitch wrote in a brief comment issued Thursday.

Republican presidential candidate Mitt Romney vowed to seek repeal of “Obamacare” if he is elected president in November.

In some ways, the Supreme Court’s ruling has a modest impact, said John Hanley, managing director, head of health care at Ziegler Capital Markets.

Even if the court had struck down the law, some other type of reform would come, and for hospitals, it all means pain in the form of reimbursement cuts.

“At the end of the day we’re still in a reform environment,” Hanley said. “The ruling is a good thing because it takes a degree of ambiguity out. But the health care industry knows that reimbursement changes and pressures are on out there; it’s an issue they’ve been dealing with for years.”

The court’s ruling also had a negligible effect on the markets, according to early afternoon trading data. Prices were generally higher in the health care market after the ruling but only modestly, according to Interactive Data’s Mid-Day Market Commentary Thursday.

“Despite the removal of this cloud of uncertainty, financial markets seem largely unfazed, barring some chopping trading in select health care names,” the commentary said.



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