CHICAGO — Nonprofit health care issuers already bracing for steep government reimbursement cuts from the new federal health care law now face a new round of cuts tied to the debt-ceiling deal.
The 12-member bipartisan committee of lawmakers charged with slicing $1.5 trillion from the federal deficit over the next 10 years is expected to play an influential role over the future of the Medicare and Medicaid programs.
Medicare and Medicaid together make up more than 50% of gross hospital revenues on average. Medicare reimbursements, which amount to 43% of hospital revenue, have increased every year since 1999.
Some providers, like Steven Glass, the chief financial officer at Cleveland Clinic, are more concerned about what will happen if the so-called super committee can’t reach an agreement by the Nov. 23 deadline. That would trigger an automatic 2%, or $50 billion, cut in Medicare, which would take effect as early as 2013.
The reductions associated with the federal budget deal follow a Medicare reimbursement cut of at least 6%, or $1.55 billion, over 10 years starting in 2014 under the new health care law.
Cuts could go deeper if annual spending does not meet targets.
Reimbursement risk, especially from federal and state governments, has become a chief credit risk for the sector, according to credit analysts and market participants.
“Reimbursement trumps anything else,” said Pierre Bogacz, managing director at HFA Partners LLC, a health care advisory firm. “[Providers’] biggest concern is health care reform and what exactly that means for acute-care reimbursement.”
Worries over reimbursement pressures, coupled with falling revenue, have prompted many providers to put capital projects on hold. Many hospitals have chosen to postpone or cancel capital spending to offset falling revenue and reimbursements. Issuance dropped 46% to $10.9 billion during the first six months of 2011 compared to the same period last year, according to Thomson Reuters.
Concerns over reimbursements have also helped drive an increase in mergers and acquisitions across the sector. Bogacz noted there have been 55 transactions so far this year, compared with 77 for all of 2010.
“It’s a natural response to the uncertainty with reimbursement,” Bogacz said. “Generally there is concern that the stand-alone strategy is going to be more challenging as reimbursement diminishes.”
Moody’s Investors Service and Standard & Poor’s last week issued reports warning that government reimbursement cuts will become a top challenge to an industry already facing several pressures.
Median revenue growth totaled 4% in fiscal 2010, the lowest in two decades, and is “unsurprising given the payer pressures and lower volumes,” the Moody’s report said.
“Reimbursement risk is a central factor in ratings that we consider, especially among speculative-grade ratings,” said Michael Kaplan, Standard & Poor’s managing director for the corporate health care sector, in a web seminar the agency posted last week on how its downgrade of U.S. debt will affect the sector.
The agency noted that the downgrade would not have an immediate impact on the nonprofit health care sector, but that its “longer-term concerns around government reimbursement to health care providers continue to grow.”
Noting the uncertainty of the outcome of the super committee’s decisions, Kaplan added that “the issue of surprises is a key one.”
The median expense rate is also down, which Standard & Poor’s credits as one of the sector’s strengths, as many providers have managed fairly well through three recessionary years.
Reimbursement cuts will likely mean more downgrades, particularly for smaller, lower-rated credits that rely heavily on government spending, analysts said.
“The credit impact of Medicare cuts on hospital ratings is inevitably negative and will lead to more rating downgrades in the absence of significant expense reductions and productivity gains,” said Moody’s analyst Lisa Goldstein in a report released last week titled “Hospital Revenues in Critical Condition; Downgrades May Follow.”