CHICAGO -- Non-profit hospitals in states that opted not to expand their Medicaid programs under the new federal health care law will face financial problems and rating pressure next year, Fitch Ratings warned in a report this week.

“The biggest impact of the new law in 2014 is going to be the lack of increase in insured volume for hospitals in states that don’t expand Medicaid combined with reimbursement cuts,” Fitch analyst Adam Kates, who wrote “Adverse Expansion: Hospitals, States, and Medicaid,” said in a telephone interview.

The Affordable Care Act, which takes effect in January, features a decrease in Medicare reimbursements and so-called disproportionate share hospital funding, a key funding source for many hospitals that treat large uninsured or impoverished populations.

The decrease in federal funding was expected to be offset by the Medicaid expansion, the state-managed health insurance program for low-income Americans that is jointly funded by the state and federal government, combined with the expansion in private insurance.

The federal government has pledged to cover the costs of the Medicaid expansion fully through 2017, then decrease it incrementally to 90% by 2020. Despite the federal funds, many states have decided not to expand the program. Hospitals in states that are not expanding Medicaid are expected to lose more than $200 billion over the next 10 years, according to the report.

So far 18 states have decided not to expand Medicaid, and seven more are in flux. In an unlucky coincidence, the 18 states that are opting out also suffer from higher uninsured rates and higher poverty rates than states that are opting in, Fitch found.

“That jumped out at us as we reviewed the date,” Kates said, adding that other groups, such as the Kaiser Family Foundation, have reported similar findings.

States with the high uninsured rates that are not expanding Medicaid include Texas, Florida, Georgia, Louisiana, Mississippi, and South Carolina.

“These states also have among the most stringent Medicaid eligibility requirements and highest poverty rates in the nation,” Fitch said in the report. “Therefore, Fitch anticipates that many hospitals in these six states will be among the most negatively affected.”

On the bonding side, it’s likely that financial pressures will translate into smaller capital plans, Kates said. “Hospital capital spending is usually correlated with hospital profitability,” he said. “To the extent that profits decline, then, based on historical evidence, capital spending would decline as well.”

Many hospitals have spent the last two years preparing for the reimbursement cuts, Kates said.

“We talked with hospitals during our surveillance about the impact and of course they’re not happy with the state’s decision to not expand Medicaid, and those decisions are in part based on political pressures,” he said.

Many hospitals have built expected cuts into their 2014 budgets, he added.

It’s difficult to predict the long-term credit impact on hospitals because of the number of moving pieces in the new law, Kates said.

Some states, for example, may decide next year or in future years to expand their Medicaid programs after all. The DSH reimbursements will be implemented over a period of time, mitigating the impact in the early years. As well, the federal government in 2015 may decide to change how it distributes DSH funds to help offset costs faced by hospitals with the largest uncompensated care rates. Individual credit factors at each hospital, such as its location and population, will also have an impact, Fitch said.

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