CHICAGO -- The not-for-profit health care sector has reached a tipping point, warned Standard & Poor’s, which this week revised its outlook to negative from stable on the sector.
“Over the last three or four years we’ve had a stable outlook, and it’s been reflective of all the actions that providers have taken to maintain, and in many cases improve, their financing profiles,” Standard & Poor’s health care analyst Martin Arrick said Wednesday during a webcast presentation on the 2014 industry outlook. “Now we are at a tipping point because we believe the negative pressures are accelerating and the ability of providers to counteract those pressures is getting harder and harder.”
Moody’s Investors Service and Fitch Ratings already have negative outlooks on the sector.
The pressures are due in part to weak revenues and other fiscal and economic headwinds. The rollout of the new federal health care law, which officially begins in January, has created significant uncertainty about the future.
Standard & Poor’s in 2013 downgraded 36 non-profit issuers and upgraded 34. But downgrades have sped up in the last few months, and analysts said they expect that to continue in 2014. Nine of the upgrades were related to mergers and acquisitions -- another trend analysts expect to continue in 2014.
“Some of those upgrades are because folks are now part of a larger, stronger organization,” Arrick said. “That’s a good credit story if you happen to be a holder of those bonds, but it does speak to the underlying pressure in the sector.”
Meanwhile, a state’s decision to expand its Medicaid program under the health care law will likely have an impact on its credit profile but it’s too early for specifics, said Gabriel Petek, a state and local government analyst at the firm.
About half of the 50 states have decided to expand their Medicaid programs as allowed under the new law, while the other half has opted not to or are still deciding.
“We see Medicaid in general as playing a larger and growing role in state credit profiles,” Petek said. “The program encompasses an increasing share of state spending ... but at the same time, so far we haven’t said the decision to expand or reject Medicaid will directly lead to a differential in credit. It’s more a question of how they manage the added enrollments going forward and any resulting budget stress it produces.”
States that expand their programs will collect a total of $37.5 billion in new federal funding, as the federal government has agreed to cover 100% of expansion costs through 2020 and 90% after that.
“That’s a pretty significant incentive for states to consider expanding with those subsidy rates,” said Petek.
States that opt not to expand will leave roughly $43 billion on the table.
It’s generally the poorer states who are opting out, while the wealthier states with higher income levels are expanding, according to Standard & Poor’s.
For states that are expanding, the new federal dollars represent 4.1% of their annual gross domestic product. The foregone dollars would have totaled about 6% of the GDP of states that are opting out, Petek said.
Despite the influx of new federal money, the decision to expand could have some negative fallout. It will increase the state’s relationship with the federal government, which has proven to be a volatile and uncertain partner in the last few years, said Petek.
“States that are expanding are increasing their linkages with the federal government,” he said. “And federal fiscal policy has been one of the greater uncertainties that states face.”
If the federal government decided to decrease subsidies, for example, the move would hit states that rely on the money harder than those that have not expanded their programs, he said.
“We see the states as having a real stake in the Affordable Care Act,” Petek said, saying Medicaid spending consumed 24.5% of the average state budget in 2013. “Unless that trend were to level off, states will basically become insurance companies that offer Medicaid.”
