Hospital CFOs Don't Share Wall Street's Optimism About PPACA

Financial analysts at some of Wall Street's top firms are bullish on the healthcare industry's prospects as a result of changes brought by healthcare reform. The CFO's I've been talking to over the past year don't see things the same way.

At a Nashville Health Care Council meeting last week, I listened to panelists from some of the biggest Wall Street firms discuss the healthcare industry's prospects for 2014. During the discussion about potential healthcare reform winners and losers, the consensus was clear: The analysts believe hospitals stand to benefit from the Patient Protection and Affordable Care Act more than most healthcare segments.

"I think the hospital sector is probably setting up as a winner just from the standpoint of incremental volume increase and alleviation of bad debt expense, which will be the top benefit from healthcare reform," said Ralph Giacobbe, director, healthcare research team at Credit Suisse. 

Kevin Fischbeck, healthcare facilities and managed care analyst, Bank of America Merrill Lynch Global Research agreed, saying, "Hospitals treat the uninsured already and are not getting paid for it, so I think increased incremental coverage will be very beneficial to the bottom line."  

Frank Morgan, managing director at RBC Capital Markets, echoed the sentiment when he said, "When I think about groups that could be positively impacted from healthcare reform and expanding access to care, certainly hospitals. I think it is good for their overall volume growth, especially around uncompensated care. Today about 8% of their patients are uninsured, so to the extent that that volume turns into paid business that would be good."

Many Unknowns
On the surface, this sounds like positive news for hospitals. However, after spending much of 2013 asking hospital and health system CFOs for their take on this subject, I'm unconvinced.

I tend to agree with Mark Bogen, senior vice president and CFO at South Nassau Communities Hospital in Oceanside, NY, who told me in August that it "more than remains to be seen" whether healthcare reform will succeed in delivering on the financial promise of decreasing bad debt and uncompensated care.

"We don't know what the heck is going to happen in the first year," he said. "It's likely that it's going to take some time to develop. It may actually take several years to develop, really, the trends and the impact of what will ultimately occur under reform."

Bogen also told me that he believes consumers are likely to purchase the high-deductible plans through the exchanges, meaning providers may find themselves having to spend more time and resources collecting from this newly insured patient population.

"[Providers] are now going to have to chase an even greater amount of dollars for the self-pay portion…," he said.

Plan Selection Will Be an Indicator
Patrick McGuire, CFO at Warren, MI-based St. John Providence Health System and the Michigan Ministries of Ascension Health, told me in October that the financial impact of healthcare reform hinges in large part on which plan consumers select—something that will likely be based mainly on their income levels and their eligibility for government premium subsidies.

"We are not sure how many people are going to select which plan… If everyone picks the bronze plan, then that could be very negative," Mcguire told me.

McGuire and his team have done a great deal of predictive modeling on the different possible financial implications of HIX, but like Bogen, he believes it's too soon to know how healthcare reform will truly impact hospitals.

"We've analyzed this in a lot of different ways, and no one really knows for sure what the actual experience will be until we start getting data."

Marlene Zurack, senior vice president of finance and CFO for New York City Health and Hospitals Corporation (HHC), the largest municipal health system in the country with $7 billion in annual revenue, is also doubtful that healthcare reform will result in a net benefit to her organization, she told me last April.

DSH Cuts 'Really, Really Hurting Us'
HHC currently serves roughly 1.4 million people per year, 475,000 of whom are uninsured. Regardless of how many more patients obtain insurance coverage through the exchanges, HHC is likely to lose revenue in the end, Zurack said, due to cuts being made to Medicaid's Disproportionate Share Hospital (DSH) program, which makes federal payments to qualifying hospitals that serve a large number of Medicaid and uninsured individuals.

HHC's DSH payments will drop from $818 million in fiscal year 2013 to about $400 million by fiscal year 2019, Zurack reported.

"It's the cuts to disproportionate share funding that are really, really hurting us. Because of that, there is no net benefit to us… Those were the cuts that were traded to pay for the Affordable Care Act. That is where we have a large problem," she said.  

Stephen Forney, vice president and CFO at Lovelace Health System, a 606-bed system based in Albuquerque, NM, said last spring that one major concern he has about the PPACA is that patients who become insured through the exchanges may not have a full understanding of their liability because most will be moving off of state-run insurance initiatives that generally have no or low premiums and co-pays.

'Sticker Shock' for the Newly Insured
"These initiatives are going to be subsumed by the exchanges, and the new products are going to have significant patient liability and premiums. That is going to be a bit of a sticker shock for those individuals who have not been used to that in the past," Forney said.

This patient population, which has traditionally sought care through the emergency department, "is going to access care in non-acute settings in a fuller fashion," he said. "When the doctor refers them to the hospital for a CAT scan or a procedure, they probably won't have the ability to pay for that out of pocket. It will diminish some uncompensated care in the ER and shift it to other sites… In a sense, what you are going to do is encourage utilization in non-acute sites by patients who can't pay the patient liability portion."

While Wall Street executives see hospitals as a bright spot on the healthcare reform landscape, it's difficult for me to buy into that theory completely. Despite hospitals' best efforts to mitigate the financial fallout from the PPACA—such as hiring onsite navigators to help patients enroll in a health plan or determine if they qualify for Medicaid and rolling out marketing campaigns to educate their communities on the new healthcare legislation—hospitals are still in danger of taking a big hit, according to most of the healthcare CFOs I've spoken to recently.  

Perhaps hospitals will fare better than most sectors in the long run, as Wall Street believes, but the jury is still out as to whether or not healthcare reform and the health insurance exchanges will be a significant boon to hospitals' bottom line.