CHICAGO — Non-profit hospitals facing a sequestration-related 2% cut in Medicare payments starting Monday will find the reduction challenging but manageable, Fitch Ratings said in a report released Thursday.

Medicare accounts for more than 40% of patient revenue at non-profit health care providers, making any reimbursement cuts a danger, Fitch said.

But most hospitals — especially the higher-rated ones — will be able to handle the hit to their bottom line, Fitch said in the report, "Hospitals, Medicare, and Sequestration Cuts."

"Anytime revenue is cut it presents challenges," Fitch analyst Adam Kates said in a telephone interview. "But we feel that the sector has demonstrated a resilience in confronting challenges over the past five years. Given that resilience, we feel they'll be able to respond adequately to offset these cuts."

The 2% cuts Medicare reimbursement are part of the $1.2 trillion across-the-board federal budget cuts known as sequestration. The automatic government spending cuts went into effect March 1, but the Medicare reimbursement reductions officially begin April 1.

The cuts have been looming for months, and most hospitals have already incorporated them into their fiscal 2013 budgets, Kates said.

Fitch estimates projects that each percentage point cut to Medicare reimbursement is likely to reduce net patient revenue by 0.39% and decrease operating profitability by 13% on average.

The rating agency projects that the 2% Medicare cuts would reduce operating profitability by an average of 30 basis points for AA- and A-rated hospitals, and 40 basis points at BBB- and BB-rated facilities, which are generally more dependent on the government revenue.

"They're not happy with it but they feel it's manageable," Kates said of hospital managers. "The majority, if not all of the hospitals, have already incorporated sequestration cuts into their budgets."

Hospitals are using a mix of revenue increases and cost-cutting measures to offset the reductions, Kates said. Some have made personnel adjustments — personnel is hospitals' single largest expense — while others have improved physician alignment or trimmed capital spending. A 1% decrease in personnel offset most of the 2% Medicare cut, Fitch noted.

More federal budget cuts could be on the horizon, and those could present more of a challenge to the sector, Fitch warned in the report.

"Although most hospitals in Fitch's rated portfolio indicate that there is room for further operating efficiencies, Fitch believes that further efficiencies may be harder to achieve given management's focus on cost management and revenue enhancement over the past five years," the report said.

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