ACA Replacement Would Strain Hospital Margins

Bond raters believe the American Health Care Act's funding changes for Medicaid, combined with the removal of the individual mandate and other changes to insurance markets, would reduce healthcare spending for the federal government and reduce revenues for hospitals.

A House proposal that would shift Medicaid from an open-ended to a per-capita entitlement program would reduce federal spending on healthcare, but harm hospitals' margins, the bond rating agencies believe.

"Operating revenues and margins for for-profit and not-for-profit hospitals are likely to be pressured by the passage of the legislation as proposed," S&P Global Ratings said in a research brief issued Wednesday.

"The overall payer mix for providers would weaken as the number of people without insurance would most likely rise as would the hospital sector's level of bad debt and charity care expenses," S&P said.

"Under the proposed bill, minimum insurance requirements will be diluted, and coupled with the elimination of the mandate to buy coverage, we believe preventive care may decrease leading to higher costs over the longer term. In additional the further growth in high-deductible plans that is likely, combined with greater levels of uninsured people, could result in higher health care costs to consumers."

S&P says that the not-for-profit health care sector is stable but already faces operating pressures because of weaker reimbursement growth owing to the movement to value-based reimbursements and rising labor costs.

"The passage of this legislation as proposed would in our view add to the stress in the sector and could lead to a negative outlook over time, especially for safety net providers which are especially vulnerable to Medicaid reductions," S&P says.

Those concerns were mostly echoed by Moody's Investors Service in its analysis.

"Importantly, the legislation does not repeal Medicaid expansion; states would be allowed to maintain expanded Medicaid eligibility, but they would bear a greater share of the costs starting in 2020," Moody's says.

"We expect that federal payments will grow more slowly than Medicaid program costs, forcing states to make changes that would likely be credit negative for hospitals, including lowering payments to hospitals and other providers, reducing coverage or benefits and reducing targeted payments to safety-net hospitals."

Credit-negative for Hospitals
Moody's says changes in the federal allocation of subsidies in the individual insurance markets would be a credit negative for hospitals.

"We believe that the effect of older enrollees losing coverage will outweigh the positive effect of younger people gaining coverage given that older people have greater healthcare needs and as they lose coverage, hospitals would incur greater uncompensated care and bad-debt costs," Moody's says.

Ending the individual mandate won't be calamitous for hospitals because most gains in insurance coverage under the ACA came through the expansion of Medicaid, Moody's says.

"Repealing the individual mandate would be credit negative for hospitals because some individuals would drop insurance coverage if they no longer face a financial penalty for not purchasing insurance," Moody's says.

"However, the credit effect on hospitals is not material given that the current financial penalties for not purchasing insurance are too small to compel many young and relatively healthy people to buy insurance."

The American Hospital Association was one of the first in a growing number of major healthcare lobbies to pan the House GOP less than one day after the bill was made public.

"We believe that any changes to the Affordable Care Act must be guided by ensuring that we continue to provide healthcare coverage for the tens of millions of Americans who have benefitted from the law," AHA President and CEO Richard J. Pollack said in a letter to Congress.

"We believe the legislation needs to be reviewed through this lens, and carefully evaluated regarding its impact on both individuals and the ability of hospitals and health systems which are the backbone of the nation's healthcare safety net in terms of our ability to care for all of those who walk through our doors."

America's Essential Hospitals offered conditional praise for some parts of the AHCA, particularly the repeal of cuts to disproportionate share payments for safety net hospitals. However, concerns about the negative effects of the reformed funding mechanisms for Medicaid and other changes to the individual coverage market outweighed the benefits.

AMA Opposes GOP Plan
In a letter Wednesday to House leaders, Essential Hospitals CEO and President Bruce Siegel, MD, urged them to withdraw the AHCA until the Congressional Budget Office can provide a nonpartisan estimate of costs and coverage implications.

The American Medical Association has also made clear its opposition to the House plan.

"While we agree that there are problems with the ACA that must be addressed, we cannot support the AHCA as drafted because of the expected decline in health insurance coverage and the potential harm it would cause to vulnerable patient populations," AMA CEO James L. Madara, MD, said in a letter to House leaders.