LOS ANGELES — Just as California's Verity Health System bounces back from its financial woes with a boost from the Affordable Care Act, it may face another challenge from repeal of President Obama's signature legislation.
"If you are talking full repeal, it would have a significant impact, because Verity benefited from Medicare expansion and from the increase in people insured, it lowered the amount of bad debt from charity care," said Stephen Forney, chief financial officer of Verity, a non-profit California chain of six hospitals serving lower-income neighborhoods in the San Francisco Bay Area and Los Angeles.
Forney said the reduction in bad debt from higher levels of insured patients under the ACA applied to any hospital, not just Verity, which has $375 million in junk rated bonds outstanding and was taken over by Blue Mountain Capital Management LLC in December 2015.
Nationally, a full repeal of the act may cost hospitals about $399.77 billion of revenue in the next 10 years, according to a report released this month by the Federation of American Hospitals and the American Hospital Association. That would put pressure on ratings of the health care sector, which has issued almost $154 billion of bonds from 2010 through 2015, with pain likely to spread to state and local budgets as well.
The most likely scenario, according to healthcare experts, would be for Congress to try to repeal as much of 2010's ACA as possible through passage of something similar to the Restoring Americans Healthcare Freedom Reconciliation Act. That bill, H.R. 3762, was vetoed by President Obama on Jan. 8, 2016.
"It's very complicated," said Joseph Antos, the Wilson H. Taylor Scholar in Health Care and Retirement Policy at American Enterprise Institute.
It is one thing for lawmakers to vote on a short reconciliation bill that they know is going to be vetoed, he said, and another thing for them to vote on a bill they know will be enacted.
The resultant loss of federal funding under such a bill could be particularly harmful to state and local governments already facing budget challenges, analysts said.
"Growth in hospital bad debt and charity care costs would resume, negatively affecting operating margins," the Wells Fargo Municipal Research Group said in a Dec. 15 report.
The healthcare segment of the municipal bond markets has already experienced a widening of spreads relative to the rest of the market since Donald Trump's election as president, according to Grant Goodman, a financial advisor in the Los Angeles office of Lancaster Pollard, an investment banking firm.
The spreads between a 30-year AAA general obligation bond subject to alternative minimum tax and BBB healthcare bonds grew by 26 basis points from Nov. 10 to Dec. 9, according to the Municipal Market Data Triple A scale.
Fitch shifted its outlook on the sector to negative for 2017 saying it expects downgrades to exceed upgrades. Profitability may weaken, Fitch said, with margins pressured by a less profitable payor mix as baby boomers move into Medicare and newly eligible Medicaid patient access services.
From a pragmatic standpoint, Verity's Forney said, some of the portions of the law that were popular are not likely to be repealed.
"You had millions of individuals added to Medicare and it would be tough to walk that back," Forney said. "You can't just pull the rug out from under people who are receiving subsidies for health insurance."
The Urban Institute released a report on Dec. 6 estimating the number of uninsured people would rise from 28.9 million to 58.7 million in 2019, a 103% increase if reconciliation bill were enacted.
The costs of serving uninsured patients often results in bad debt for hospitals and weighs heavier on regional and stand-alone hospitals, which have experienced a greater widening of spreads on their bonds then larger hospital systems, Goodman said.
Wells Fargo sees an action coming quickly on repeal, but slowly on the replacement piece, presenting a challenge to the industry.
Moving forward without legislative agreement on a replacement plan is a risky strategy "that could lead to dysfunctional individual insurance market conditions, higher uninsured levels and tougher operating conditions for hospitals," wrote George Huang, a Wells Fargo municipal research group senior analyst in a Dec. 15 report.
It's tough to ascertain how much of an impact repeal would have, because it is hard to figure out how much federal funding that was reduced to pay for ACA would be restored, Forney said.
Obamacare was paid for using $802 billion in Medicare cuts to hospitals and insurers over a 10-year period, according to a Congressional Budget Office report.
"So, if ACA is fully repealed," Forney said, "all that money goes back into Medicare. It is moving money around, but there are timing aspects."
Rick Pollack, AHA president and CEO, and Chip Kahn, FAH president and CEO, aren't convinced the money would go back into Medicare. They sent letters to President-elect Trump and Congressional leaders asking that reductions for Medicare and Medicaid hospital services that were shifted to cover ACA be restored if the law is repealed.
The AHA/FAH study, like the Urban Institute's, looked at the impact based on the rebirth of last year's reconciliation bill. The study estimated hospitals would face a net negative impact of $165.8 billion from 2018-2026 after accounting for restoration of the Medicaid Disproportionate Share Hospitals payment cuts. Hospitals would also experience a loss of $289.5 billion in Medicare inflation updates and lose another $102.9 billion through Medicare and Medicaid DSH reductions.
The DSH funding, which provided more funding to hospitals that served a disproportionate share of Medicare or uninsured payments, was being phased out under ACA. The idea being that if everyone is insured, government would not need to fill the gap.
Like the national AHA, the Illinois Hospital Association compiled preliminary estimates on the costs absent restoral of that funding.
IHA says its data shows hospital members have already absorbed more than $1.1 billion of ACA-related payment reductions between 2010 and 2015 with an additional $8 billion expected between 2016 and 2025.
Illinois was among the states that embraced the ACA's Medicaid expansion.
If repealed, the state would lose $3.1 billion in federal Medicaid funding in 2019 and $37.4 billion between 2019 and 2028, according to the state-by-state data from the Center on Budget Policy and Priorities. The number of uninsured with ACA in place would jump from 896,000 to more than 2 million, according to the center which cited Urban Institute data.
IHA also evaluated other potential economic hits.
"If Congress repeals ACA coverage and does not replace it, the preliminary estimate is that the loss of revenue in Illinois (from more than 1 million Illinoisans no longer being covered) will result in a potential loss of $11.6 billion to $13.1 billion in annual economic activity which translates to a potential loss of 84,000 to 95,000 jobs."
California also expanded its Medicaid program, which serves low-income individuals through the California Medical Assistance Program, or Medi-Cal. States who adopted an expansion plan added coverage for low-income childless adults under their Medicaid programs.
California could lose $15 billion in federal funding if the Medicaid expansion under ACA is repealed, according to the state's Department of Finance.
"In expansion states, you see charity care costs almost uniformly across state hospitals going down dramatically since the implementation of ACA, because more people have coverage," Forney said.
Under ACA, the federal government pays 100% of those costs for the first three years and then 95% from 2017 declining gradually to 90% by 2022.
Of the 14.1 million covered through Medi-Cal in 2016-17, 3.8 million were covered as a result of the ACA expansion of state Medicaid programs. About 2 million Californians have bought private insurance through the exchange.
The state's budget for the expansion for fiscal year 2016-17 is $16.17 billion. Of that amount, the state paid only $819.5 million in general fund dollars. The total Medi-Cal budget for the nearly 14 million including children, adults, the elderly and disabled is $93 billion, of which California contributes $18 billion from the general fund.
Nationally, the Urban Institute's report estimated that federal government spending on health care for the nonelderly would be reduced by $109 billion in 2019 and by $1.3 trillion from 2019 to 2028 because of the elimination of the Medicaid expansion, premium tax credits and cost-sharing assistance.
State spending on Medicaid and the Children's Health Improvement Program would fall by $76 billion between 2019 and 2028. In addition, because of the larger number of insured, financial pressures on state and local governments as well as health care providers would increase dramatically, the report said. The financial pressures would result from the newly uninsured seeking an additional $1.1 trillion in uncompensated care between 2019 and 2028.
In California, the state has budgeted for the optional expansion through June 2017, said H.D. Palmer, a spokesman for the state's Department of Finance, the governor's chief fiscal policy advisor.
California will not make any changes in anticipation of repeal. By law, the governor has to submit a budget by Jan. 10, but the state can make changes during the May Revise.
"In terms of how it would affect the state, the short answer is we do not know specifically," Palmer said. "The dialogue so far from the president has been about repeal and replace — the question is: replace with what?"
An already cash-strapped Louisiana could disproportionately suffer from the loss of funding compared to other states, because it has the third-highest adult poverty rate in the U.S.
"Louisiana gets more Medicaid dollars from the federal government than the rest of the U.S. because it has a large poor population," said Jan Moller, director of the independent, nonpartisan Louisiana Budget Project.
Gov. John Bel Edwards, a Democrat, signed an executive order shortly after taking office in January expanding Medicaid to cover more of the state's low income residents. To date, 359,911 people have signed up for coverage that started July 1.
Edwards has said he's concerned about the uncertainty the program now faces, but he doesn't believe that Trump or Congress will repeal the coverage that millions are receiving across the country.
The state also baked about $180 million of federal funds into the current budget to cover new Medicaid enrollees the first year. Repeal of ACA would mean the loss of $4 billion in additional federal funding between 2019 and 2028, according to the Urban Institute.
Louisiana must eat a $315 million deficit discovered when the fiscal 2016 books closed, and state revenues are now lower than predicted, potentially pushing the budget gap north of $600 million.
The implications for the state budget are "extremely serious," Edwards said, because of the widening deficit and a $1.5 billion fiscal cliff facing the state when temporary revenue-raising taxes fall off in 2018.
"Because we are a state that is very tied to the energy sector we have an economic recession right now while the rest of the country is starting to recover from the great recession," Moller said. "If we lose federal funding for healthcare, it's only going to make [budget problems] worse."
Republican-led states will also feel the fiscal pain.
Ohio and Michigan were among the states with Republican leadership that opted to expand Medicaid. The CBPP estimates Ohio would lose $3.5 billion in federal Medicaid funding in 2019 and $42.2 billion between 2019 and 2028. The number of uninsured in Ohio would jump from 621,000 to nearly 1.6 million. Michigan also chose to expand Medicaid. It could lose $2.5 billion in federal Medicaid funding in 2019 and $30 billion between 2019 and 2028, according to the CBPP. The ranks of uninsured could rise from 508,000 to more nearly 1.4 million.
A repeal also raises uncertainties for some local governments, especially those counties that operate publicly subsidized healthcare facilities. Cook County, Illinois, has convened an internal working group that is gathering information across all county departments to gage the impact. The county is the largest provider in Illinois of medical care for the uninsured and underinsured and had long struggled to cover costs.
The ACA "dramatically improved the health system's finances by providing Medicaid coverage for patients who were previously treated free of charge. It paved the way for the creation of the Health System's Medicaid managed care plan, called CountyCare, the Chicago Civic Federation noted in its review of the county's 2017 budget.
"Since the launch of CountyCare in 2013, the health system has begun to see more insured patients than uninsured patients. Previously over half of the health system's patients were uninsured and generally did not pay for services," the report said.
The health system has posted several years of operating surpluses while general fund support has declined. The county's general fund subsidy declined to $220 million in fiscal 2015 from $516 million in fiscal 2009.
"The operating surpluses, which followed three years of operating deficits, were due largely to reductions in the uninsured population through the implementation of CountyCare," Moody's Investors Service wrote in its last county report published earlier this year.
Initially, the ACA drove uncompensated care costs down, but that's been a short-lived effect. After declining to $342 million in 2014 from $561 million a year earlier, uncompensated care costs rose to $370 million last year and are expected to grow to $450 million this year and then $503 million next year.
Despite Trump's campaign promise to repeal the ACA, Fitch does not expect that key coverage expansions under Medicaid and through the insurance exchanges will be eliminated immediately.
"Although details of Republican plans to 'repeal and replace' ACA are limited," Fitch wrote in a report on the sector's 2017 outlook this month, "an elimination of the ACA's key coverage expansion provisions – resulting in rising uninsured and uncompensated care levels – would be credit negative."