CHICAGO — As the nonprofit health care world keenly awaits the U.S. Supreme Court’s ruling on the new federal health care law, credit analysts warn that a ruling striking down the individual mandate while maintaining the rest of the law would deliver a blow to the already-suffering sector.
The court, which held oral hearings on the new law in late March, is expected to make a decision by late June or July, before its summer recess.
The justices could strike down or uphold the entire law, or remove the controversial and key provision that requires individuals to buy insurance.
Many observers say the law would not survive without the insurance mandate, as private insurance companies would still be required to offer insurance to those who seek it but wouldn’t have the benefit of insuring a broader, healthier segment of the population.
The new law generally is expected to have a negative impact on nonprofit hospitals, Moody’s Investors Service said in a new report. It does feature a handful of positive provisions for hospitals, but most are outweighed by significant cuts in Medicare rates as well as other reimbursement pressures, the agency said.
If the individual mandate is removed, the negative features would have a bigger impact, Moody’s analyst Mark Pascaris wrote in the report, “Supreme Decision: Prohibition of Individual Mandate Would Remove Healthcare Reform’s Best Feature for Hospitals.”
“Without the individual mandate, this large, uninsured share of the patient population would likely continue to grow as employers will be unable or unwilling to bear the growing cost of health benefits,” Pascaris wrote. “The continued rise in uncompensated care will reduce hospital margins and suppress debt service coverage, creating added credit stress in the sector.”
The burden on private insurers if the court overturns the mandate would weaken the entire market, according to Moody’s.
“This scenario could become untenable for many insurers and hospitals, as costs would rise but revenues would not,” Pascaris wrote. “Policymakers, regulators and the health care industry may face the need for further reforms and changes in funding and regulation.”
But a handful of provisions with positive implications for the sector would remain even if the court removes the insurance mandate, he added. These include the requirement that dependent coverage is extended to children up to 26 years old, the creation of state health insurance exchanges, the expansion of Medicaid, and the ban on private insurers denying coverage to those with pre-existing conditions or terminating existing coverage.
The uncertainty surrounding the fate of federal health care reform is driving the decision by many hospital executives to defer capital spending.
The volume of tax-exempt hospital paper has been down last year and so far this year, and it’s a trend that could continue, Moody’s said in a separate report out this week showing preliminary 2011 medians for the sector.
Moody’s noted that the median average age of plant, or how old a hospital’s fixed assets are, which is an important criteria for the sector, increased to 10.3 years in fiscal 2011 from 10 years in 2010. That is “further indication that hospitals are delaying capital spending until the economy more fully recovers and the uncertainties surrounding health care reform are more clearly promulgated by the federal government,” the agency said.
Annual debt-service coverage levels rose to 4.6 times in 2011 compared to 4.3 times in 2010 and 4.1 times in 2009.
The decision to delay borrowing plans has helped boost liquidity levels, analysts noted. Median cash on hand increased to 175 days in fiscal 2011 from 162 days in fiscal 2010, the report said. Cash-to-debt medians grew, to 126% in 2011 from 118% in 2010.