CHICAGO — Non-profit hospitals, especially lower-rated ones already struggling in a tightened reimbursement environment, would bear the brunt if Congress is forced to make cuts in the sequestration process next January, Fitch Ratings warned in a commentary released Thursday.

A new report from the Office of Management and Budget says Medicare would be cut by $11.1 billion, or 2%, if Congress is forced to make $1.2 trillion of across-the-board cuts starting Jan. 2, 2013. About half, or $5.8 billion, of the cuts would be to hospitals.

Medicaid spending would be exempt.

The cuts would further challenge a sector already struggling with revenue pressures, Fitch analysts said.

“Any cuts in Medicare will impact all providers, but particularly smaller providers with higher government payer mix that don’t have the expense space to generate more revenues,” said Fitch health care analyst Jim LeBuhn.

By hitting lower-rated credits more than higher-rated ones, sequestration cuts would aggravate the credit gap that has long characterized the non-profit hospital sector.

Fitch said it expects sequestration to be “averted or modified,” but added that most providers have still incorporated reimbursement reductions into their 2013 budgets. 

“Clearly the industry’s known these sequestration cuts are possible, and so we expect and we’ve heard from organizations that this is just one more revenue pressure or reimbursement pressure that they’ve had to manage,” LeBuhn said.

Together, Medicare and Medicaid make up 60% of a hospital’s gross revenues, though the figure varies widely depending on the credit.

Reimbursement pressures from all payers are one of the health care sector’s main challenges. With or without the 2% sequestration cuts, the industry is in the midst of a major shift toward new payment models, analysts said.

“Fitch does not expect more clarity on funding levels until after the 2012 presidential elections,” Fitch said in the comment. “However, despite the outcome of the elections, Fitch believes that the fee-for-service reimbursement environment with limited accountability is unsustainable. Those providers that will be able to handle a change in reimbursement levels are the ones that remain focused on operating efficiency, resource allocation, physician alignment, and investment in electronic medical records.” 

Fitch, along with Standard & Poor’s, maintains a stable outlook on the non-profit health care sector. Moody’s Investors Service has a negative outlook on the industry. But analysts from all three credit agencies agree that reimbursement pressures tied to various federal and state initiatives, including the new health care law, remain a chief concern.

The American Medical Association said last week that the cuts would lead to the loss of up to 766,0000 health care-related jobs by 2021. The report says the Medicare reductions will lead to direct job losses of nearly 500,000 jobs the first year of the sequester.

Like Medicaid, the Children’s Health Insurance Program is exempt from sequestration cuts, along with veterans’ health benefits and medical care from the Department of Veterans Affairs.

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