How ACA ruling may harm nonprofit hospitals

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A Texas federal judge’s ruling that the Affordable Care Act is unconstitutional will challenge the credit quality of tax-exempt hospitals and health systems if it stands.

“If this, ruling is not overturned the credit quality of many health care providers, insurers, and states could be hurt,” S&P Global Ratings analysts wrote in a report Monday. “Most notably tax-exempt hospitals and health care systems — which provide the bulk of U.S. health care — will see a broad diminution in credit quality over time in our view as the growth in both bad-debt expenses and charity care costs would directly lower operating margins.”

Moody's Investors Service analysts wrote Monday that there is no immediate credit implication for states, hospitals or health insurers because the ACA will remain in effect during the appeals process.

The ruling from U.S. District Court Judge Reed C. O'Connor came Friday in a district court in Fort Worth.

If the ruling holds through the appeals process, S&P predicts “the loss of billions of federal dollars coming into ACA driven Medicaid expansion states would represent a significant cost increase for these states if they sought to maintain coverage for the expansion population.”

The White House issued a statement Friday saying it expects the ruling will be appealed to the U.S. Supreme Court and pending the appeal process, the law remains in place.

"Broadly speaking, there are three actions that the Supreme Court could take if the court agrees to review the case," Moody's analysts wrote. "It could find the entire ACA unconstitutional, rule that only a portion of the law is unconstitutional, or uphold the entire law. It is also possible that Congress uses this legal challenge as an opportunity to write a new healthcare law."

If the law is found to be unconstitutional, federal funding for Medicaid expansion and subsidies to individuals purchasing insurance on the health exchanges would end — an outcome that would be significant for all affected sectors, Moody's wrote.

"This scenario would be credit negative for hospitals, especially those in Medicaid expansion states, because it would increase the number of uninsured patients, resulting in higher bad debt and uncompensated care," Moody's wrote.

The credit impact on states would depend on their responses to the ultimate ruling as some states have not expanded Medicaid and would not lose any funding, while others would that did would likely revert to prior eligibility levels and eliminate ACA-related spending, Moody's analysts wrote.

The case was filed in April by Texas Attorney General Ken Paxton, who was joined by 18 Republican state attorney generals and the governors of Maine and Missouri in challenging ACA. California Attorney General Xavier Becerra is leading a group of 17 Democratic attorney-generals who have filed briefs defending the law.

House Speaker-designate Nancy Pelosi said in a statement that when Democrats take the gavel in January, the House of Representatives will “move to formally intervene in the appeals process to uphold life-saving protections for people with pre-existing conditions and reject Republicans’ efforts to destroy the Affordable Care Act.”

California Gov. Jerry Brown also issued a statement saying that California “will vigorously fight" the ruling.

S&P analysts said they “expect the ruling to be stayed in the near term pending consideration by the appeals court and possibly the Supreme Court, leaving current insurance markets unchanged.”

Broad uncertainty about a sharp rise in uninsured levels would be a renewed risk for health care ratings, they wrote.

“Longer term, this ruling, if upheld, also has the potential to change the direction of the current efforts to reform the U.S. health care delivery system fundamentally,” S&P analysts wrote. “Given the makeup of the incoming Congress, we think it is highly unlikely bipartisan compromise could be reached on such a large subject, one that amounts to one-sixth of the U.S. economy. In our view, the demise of the ACA would become the number one issue in the 2020 presidential election."

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Obamacare Healthcare-related court cases Not-for-profit healthcare Healthcare industry California Texas