SAN FRANCISCO – Moody’s Investors Service said a court ruling that allows California to cut its Medi-Cal program is a negative for the credit ratings of hospitals, and positive for the state’s fiscal flexibility.

On May 24, the Ninth U.S. Circuit Court of Appeals upheld the right of California to implement a 10% cut to its Medicaid program proposed in 2011, which totals $600 million annually, according to Moody’s.

“The ruling is a positive for the state because it increases budget flexibility and clears the way to cut costs in an area that has experienced spending pressure for many years,” Moody’s said in a note Monday.

Medicaid spending made up more than 24% of state spending in fiscal 2011, the ratings firm said.

Some state lawmakers have proposed bills that would reverse the Medi-Cal cuts, and Brown has said he will veto the legislation if it makes it to his desk. The savings from the reductions are included in Brown’s proposed budget. 

The cuts will hit hospitals indirectly because they impact doctor reimbursements and many physicians work for medical foundations that have exclusive contracts with certain hospitals, according to Moody’s.

“Thus, for these institutions, reductions in Medi-Cal reimbursement rates for physicians will have a negative incremental effect on consolidated operating income,” Moody’s said.

Moody’s said the ruling also has implications nationally since the lawsuit was a challenge to a state’s ability to make large cuts to Medicaid.

Nationally, Medicaid made up nearly 24% of all state spending in fiscal 2012, the ratings firm said, citing the National Association of State Budget Officers.

Healthcare providers argue that state cuts to Medicaid could end up forcing them to drop out of the program, Moody’s said.

Providers have said they intend to appeal the appeals court ruling to the U.S. Supreme Court. Moody’s said it is unlikely the court will accept the case because it already heard it in 2012 and returned it to the lower court without a ruling.

As California’s finances have improved, Standard & Poor’s upgraded the state to A from A-minus in January, and Fitch Ratings upped its outlook on the state to positive with an A-minus rating in March. Moody’s Investors Service rates the state’s general obligation bonds A1.

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