The 2% Medicare reimbursement cuts mandated by the federal sequestration over the next 10 years pose a big threat to not-for-profit hospitals, says a report from Moody's Investors Service.
In its report, "The Sequester Series: Sequestration's Medicare Reductions Present New Headwinds for Not-for-Profit Hospitals," Moody's finds that not-for-profit hospitals are generally vulnerable to the cuts because they rely heavily on Medicare reimbursements. Hospitals are especially at risk if they have not already budgeted for the cuts or made spending adjustments in preparation for reduced Medicare payments.
"Among all Moody's-rated not-for-profit hospitals, Medicare reimbursements accounted for a median 43.7% of gross patient revenues in 2011, a percentage that has risen steadily for several years. Barring material Medicare reform, this percentage will continue to increase as the U.S. population ages and becomes eligible for Medicare whilst increasing their utilization of healthcare services," says the report.
Sequestration mandates roughly $1.2 trillion in spending cuts over the next decade with $85 billion of those cuts to take place by October. The Centers for Medicare & Medicaid Services estimates that it will reduce reimbursements to healthcare providers by $11 billion in 2013.
"The cuts exacerbate an already challenging operating environment for not-for-profit hospitals as many already face low revenue growth from both governmental and private insurance payers," the report notes.
Sarah Vennekotter, Moody's assistant vice president and analyst and lead author of the report, says not-for-profit hospitals are at financial risk because Medicare is typically their largest payer and more payment reductions are on the horizon.
"These cuts are the beginning of a series of Medicare cuts that we see coming. The 2% cuts are in addition to Medicare cuts in the Affordable Care Act, and we see additional cuts upcoming," Vennekotter says.
"In many cases [providers] lose money on Medicare reimbursement—the money they receive is less than what it actually costs them to provide the care. Given that the population will continue to age, and we'll see baby boomers becoming eligible for care and increasing their use of services, there is a sense of urgency to improve financial performance. The way to do that is to lower the expense base," she adds.
Moody's Investors Service rates 460 health systems in its portfolio, and Vennekotter says some organizations have been more successful than others when it comes to trimming the budgetary fat.
"Management teams have largely been successful in offsetting the lost revenue, but that is just a median. So you have some larger providers with economies of scale that have been able to do well in the current environment, and you have some smaller, single site hospitals that don't have the economies of scale. We anticipate that they will continue to struggle."
In the report, Moody's lists the 15 not-for-profit hospitals it believes to be the most at risk due to Medicare cuts:
- Central Florida Health Alliance, Leesburg, FL
- Citrus Memorial Hospital, Inverness, FL
- Kuakini Health, Honolulu, HI
- Eisenhower Medical Center, Rancho Mirage, CA.
- Baxter Regional Medical Center, Mountain Home, AR
- Deborah Heart & Lung Center and Foundation, Brown Mills, NJ
- Munroe Regional Health System, Lady Lake, FL
- Jefferson Regional Medical Center, Jefferson Hills, PA
- Martin Memorial Medical Center, Stuart, FL
- NCH Healthcare System, Inc., Naples, FL
- East Jefferson General Hospital, Metairie, LA
- Yavapai Regional Medical Center, Prescott, AZ
- Flagler Healthcare System, St Augustine, FL
- Ohio Valley General Hospital, McKees Rocks, PA
- Beebe Medical Center, Lewes, DE
"The reason we pulled these hospitals is that they have the most exposure to Medicare in our portfolio. These are providers who, in the worst case, have 70% of their gross revenue coming from Medicare," says Vennekotter, noting that on average, these hospitals generate 60% of their gross revenue through Medicare reimbursements.
In addition to the immediate threat created by Medicare cuts, the report says sequestration will also have an indirect effect on some hospitals because it will cause the nation's economic growth to slow down.
"Moody's Analytics looks at the macroeconomics situation going on in the U.S… They have indicated that the GDP growth will be lower than anticipated due to sequestration… We could see some negative economic impact in states that have a large number of federal employees. Hospital providers in those areas may experience patient volume decline as employment stagnates, if people lose their jobs and insurance," Vennekotter says.
Although Moody's outlook for the not-for-profit hospital sector is negative, it says it does not intend to take immediate rating action on any of the hospitals in its portfolio based on the sequestration; instead, it will monitor the credit impact of the cuts over time.