Looming Budget Cuts Make Hospital Belt-Tightening Increasingly Difficult

The economy might be on the rebound, but the nation's hospitals should still brace for the possibility of $360 billion in cuts in Medicaid, Medicare, and other federally funded healthcare programs and services over the next decade.

Moody's Investors Service said in a credit outlook that the ongoing reductions in federal funding for healthcare in the fiscal 2013 budget and beyond could make it disproportionately more difficult and more expensive to borrow money for hospitals that rely on Medicare.

"If adopted, the cuts would reduce reimbursement to hospitals, forcing these institutions to continue finding additional expense savings or new sources of revenue to avoid the credit negative deterioration of their profit margins," Moody's said in a budget analysis.

"Most hospitals have been adjusting to negative credit trends since 2008, and many have improved their quality and efficiency substantially. But past operating savings reflect harvesting 'low-hanging fruit,' while future savings will be harder to achieve and will require more wrenching change."

Medicare rate increase reductions installed under the healthcare reforms will enter their third year when the fiscal 2013 budget takes effect in October. Over the next decade, Moody's says, about $268 billion in Medicare reductions could adversely impact funding for critical access hospitals, graduate medical education, and bad debt relief.

Moody's noted that the Medicare Payment Advisory Commission in January recommended a Medicare rate adjustment of 1% for the coming budget cycle, which is less than half the rate of inflation in the overall economy.

Lisa Goldstein, associate managing director at Moody's, told HealthLeaders Media that hospitals have done a good job confronting cost growth. "Low-hanging fruit examples would be reductions in work force, not filling existing positions, matching clinical needs with nursing skill sets better, looking at supply costs, negotiating bigger discounts with vendors, buying in bulk for example," Goldstein says.

However, she believes the "wrenching change" that hospitals may now have to undertake will be considerably more involved.

"'More wrenching change' speaks to the next level of cost reduction and expense management, which is more about gaining efficiencies. That is taking apart the fundamental basic building blocks of patient care and recreating them all over again in a more efficient manner," she says. "We have heard from providers across the country, examining how they deliver healthcare, the processes, the operations, the patient flow to become more efficient and extract permanent savings that way."

The federal budget also calls for about $52 billion in cuts to federal funding for Medicaid in the coming years. Moody's said those changes could include replacing current funding formulas with a single matching rate for each state, rebasing disproportionate share payments, and limiting the federal funding match for provider taxes.

"A limit on federal matches for provider tax payments would be a significant development because these programs have proliferated significantly over the past several years, and receive on a combined basis an increasing amount of federal support," Moody's said.

"Prior to 2008, 15 states operated provider fee programs. Today, this number has grown to 33, with another three states considering a program. These programs most benefit hospitals with high exposure to indigent populations and their elimination would negatively affect those hospitals the most," the report said.

Goldstein says the federal government could eventually shut down provider tax schemes as a cost cutting measure for the federal deficit. "Most hospitals realize that these provider tax programs may not go on forever," she says. "We look to hear how those hospitals and management teams will lower their reliance on these funds. How are you going to manage if this program abates one day?"