Wells Fargo Securities expects not-for-profit hospitals to experience challenging conditions in 2013.

"Not-for-profit hospital margins have continued to compress due to a combination of unrelenting reimbursement pressures from all payor sources and a continued ramp up of expenses for healthcare reform preparations," wrote Wells Fargo Securities senior analyst George Huang.

On the other hand, the introduction of the Patient Protection and Affordable Care Act's provisions in 2013 will increase the proportion of indigent patients who have health insurance.

This will increase the amount hospitals get from these patients, Huang wrote in "2013 Not-for-Profit Hospital Outlook."

"Key industry financial operating and balance sheet metrics … showed some signs of erosion in 2012," Huang wrote.

This deterioration will continue in 2013 because of four factors pushing patient reimbursements downwards, Huang wrote.

First, "new federal reimbursement methodologies will be in effect for 2013, including Medicare value-based purchasing (which links Medicare reimbursement to quality metrics) and penalties for preventable hospital readmissions. Both of these methodologies are expected to reduce payments to hospitals that fail to meet key care quality indicators."

Second, "hospitals continue to see smaller rate increases in multi-year contracts negotiated with commercial healthcare insurers."

Third, the growth of tiered provider networks in commercial health plans will restrict revenue growth.

Fourth, outside of the Affordable Care Act's expansion of those eligible for Medicaid, states continue to take steps to reduce their Medicaid obligations and funding levels.

In another probable negative for hospitals, any federal fiscal deal is likely to reduce federal reimbursements for Medicare and Medicaid providers without affecting patients, Huang wrote. Huang projects the cuts at around $500 billion over the next 10 years.

Furthermore, Huang believes "that the tax exemption for employer sponsored insurance (ESI, which is estimated to be worth approximately $260 billion in foregone revenues annually) is at risk in a deficit-reduction deal. If Congress eliminates the ESI exemption or imposes a limit on the exemptions, there could be a negative ripple effect on commercial insurance coverage levels and patient utilization, which could ultimately create a drag on hospital financial performance."

On the plus side, "with the status of the ACA settled, hospital management teams have gained confidence to move forward with delivery system reforms and with pursuing other reform-related strategies…

In addition, most not-for-profit hospitals expect to enjoy some upside benefits from better commercially insured patients and increased Medicaid coverage in their service areas starting in 2014."

Republican governors' lack of enthusiasm for the ACA could reduce the implementation of the act's health insurance exchanges and Medicaid expansion in those states. In 2013 Republicans will be governors of 30 states and will be the majority of 26 state legislatures. In 23 states the party will control the governorship and the legislature.

"Hospitals in states that opt out [of] the Medicaid expansion will likely be at a financial disadvantage," Huang wrote.

Overall, "We are optimistic about hospitals' ability to adapt to the increasing pressures on the industry," Huang wrote. However, "We believe some smaller and lower investment-grade standalone providers may struggle a bit more to adapt."

Hospital issuance should continue to grow in 2013, Huang predicted.

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