It has been a tough summer so far for municipal credits, with media headlines trumpeting Puerto Rico's potential default, Chicago's pension funding issue and a litany of state budget problems. Yet in the midst of all the negativity, there was some recent good news for one of the major muni sectors, namely health care. The June 25 Supreme Court decision in the King v. Burwell lawsuit upholding the legality of the insurance subsidies for persons living in the 34 states that had not established their own health exchanges was a positive development for non-profit hospitals. Although future repeal of, or amendments to the Affordable Care Act (ACA) cannot be ruled out, the tax-exempt health care sector, the second-best performing muni sector this year through June, was able to duck a major bullet.
In an earlier decision in 2012, the Supreme Court affirmed the notion that the individual mandate constituted a tax that would be overseen by the IRS, but ruled that the federal government could not force the individual states to expand Medicaid. Although universal Medicaid expansion would further boost hospital income, 21 states have yet to authorize such expansion.
In an effort to compel this additional coverage, the federal government has threatened to withhold unrelated Medicaid funding from non-expansion states. Earlier this year, the state of Florida was told that the administration may not reauthorize $2.2 billion in funding for Florida's hospitals Low Income Pool, which covers uncompensated care and has been used to bolster reimbursement to hospitals, particularly safety-net hospitals (pursuant to a Medicaid waiver, the Florida Low Income Pool is designed to ensure that Medicaid managed care recipients could maintain access to hospital care). Florida has responded with a lawsuit against the federal Centers for Medicare & Medicaid Services (CMS) for its threats to withhold these Medicaid funds.
All in all, 10 non-expansion states—Texas, Kansas, Alabama, Florida, Georgia, Idaho, Louisiana, Nebraska, South Carolina and Utah—have requested a Congressional investigation of CMS's actions. A withholding of these Medicaid funds from non-expansion states could have a materially adverse effect on hospitals located within these jurisdictions. A return to the pre-ACA environment of large amounts of bad debt and charity write-offs would have been disastrous for many stand-alone non-profit hospitals.
First and foremost, the King v. Burwell Supreme Court decision provides a lifeline to many of the state-run exchanges that have been struggling financially and technologically, particularly those in Hawaii, Oregon, Massachusetts, Maryland, New Mexico and Nevada, which have reportedly suspended their operations either permanently or temporarily. Colorado, Minnesota and Vermont are also considering discontinuing their exchanges. Since federal funding for the exchanges is no longer available, many troubled state exchanges may switch to the federal exchange, Healthcare.gov, at an estimated cost of $10 million each. Others are considering raising fees on insurers or asking their respective states for fiscal infusions. Still others are contemplating regionalizing their exchanges.
The Supreme Court ruling has also led to a frenzy of merger activity within the large insurer market. The individual mandate, combined with the ability to access the market regardless of pre-existing medical conditions (aka "guaranteed issue") and the expansiveness of required policy provisions, has raised the price of insurance as well as the need for an actuarial balance that requires the engagement of a substantial healthy patient population.
Although insurance industry titans have sufficient cash reserves, it is unclear if sufficient volumes of healthy patients have purchased insurance. Many people, particularly, the young not covered by employer health plans, are finding that the plethora of "doc in the box" arrangements, together with the IRS-mandated uninsured penalty, are less expensive than purchasing insurance, even considering the subsidy. Already, Assurant Health, which employs 1,200 persons in Milwaukee and insures slightly fewer than one million lives, has announced that it would cease selling individual policies as of June 15 of this year and would not participate in Obamacare in 2016. Certain of its businesses will be sold to National General Holdings of New York.
Fitch rating analysts expect greater pressure on insurers' profit margins as both the administration and employers accelerate their attempts to reduce health care costs. Because of the expected post-merger market concentration, it is questionable whether these mergers, with their expected back-office savings, will result in lower premiums for consumers. The Justice Department is gearing up to examine the expected merger applications and the likely effects on market competition and premium pricing.
Both hospitals and physicians are concerned that these mergers could simultaneously reduce reimbursement and trim networks. Such concerns are reinvigorating consolidation in the provider market, particularly as the administration advances shared cost savings ideas as Medicare Accountable Care Organizations (ACOs) , groups of doctors, hospitals and ancillary health providers that join together to provide high-quality medical care to their applicable Medicare patients. ACOs are essential for Population Health Management, which endeavors to improve health outcomes by aggregating patient health actuarial data from inpatient, outpatient, physician visits and pharmaceutical utilization via health information technology (electronic medical records) to track and improve patient outcomes, manage chronic diseases and lower costs.
Hence, we can expect to see more insurance company and hospital mergers as well as physician group consolidation both within and outside of hospitals.
Although hospitals, particularly those in Medicaid expansion states and those located in states with more robust economies, have reported reductions in bad debt and charity care, certain features of Obamacare have left single-site, rural hospitals and critical access hospitals vulnerable to financial uncertainty due to upcoming anticipated insurer consolidation.
Against this backdrop of an increasingly complex health care environment, NewOak will soon be releasing MuniScore for Health Care, an innovative hospital credit scoring system designed to help institutional investors monitor and manage health care risk within their portfolios. Based on a scale from 1 to 10 in order of increasing risk, our MuniScore combines service area socio-economic factors, operating and regulatory factors and financial factors into an integrated score for the 270 stand-alone hospitals and 157 health systems for which full financials are currently available, equivalent to just under 80% of the S&P Health Care Index. At full buildout, our scores will also reflect the latest quarterly financials.
Because of the long-standing clinical best practice linkages between hospitals and physicians and robust patient actuarial data via home-grown insurance units, integrated health care systems, such as Geisinger and University of Pittsburgh Medical Center (UPMC) in Pennsylvania, will be among those institutions best equipped to function well under Obamacare within the coming years.
On the other end of the credit scale, our MuniScore system correctly predicted the deteriorating creditworthiness of the East Liverpool City Hospital in Ohio. From 2009 to 2013, the hospital's Muniscore rose from 6.71 to 8.30, a sign of sharply rising credit risk. Moody's downgraded East Liverpool from Baa2 to Caa1 over the same period.
