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Bond Raters Fret Over Possible Impact of ACA Invalidation

Analysis  |  By John Commins  
   December 18, 2018

Analysts believe Friday's ruling declaring the ACA to be unconstitutional will get tossed out on appeal. Until then, however, the ACA's precarious status will sow uncertainty across the healthcare sector.

A federal judge's ruling that the Affordable Care Act is unconstitutional could be bad news for states, healthcare providers, and health insurers, financial analysts say.

Moody's Investors Service, Fitch Ratings, and S&P Global Ratings this week issued near-identical predictions of rough times ahead if U.S. District Judge Reed O'Connor's ruling late Friday is not reversed on appeal.

"If the entire law is found to be unconstitutional, federal funding for Medicaid expansion and subsidies to individuals purchasing insurance on the health exchanges would end—an outcome that would be significant for all affected sectors," Moody's said.

Hospitals

"This scenario would be credit negative for hospitals, especially those in Medicaid expansion states," Moody's said, "because it would increase the number of uninsured patients, resulting in higher bad debt and uncompensated care."

S&P said tax-exempt hospitals and healthcare systems—which provide the bulk of U.S. healthcare—"will see a broad diminution in credit quality over time in our view as the growth in both bad-debt expenses and charity care costs would directly lower operating margins."

That concern was already raised this week by Bruce Siegel, MD, president and CEO of America's Essential Hospitals, who said safety nets would suffer the most if O'Connor's ruling is upheld.

"The crushing rise in the number of uninsured patients likely to follow this decision, absent a higher court's reversal, would push these hospitals to the breaking point," Siegel said. "Communities across the country are in jeopardy."

Fitch Ratings agreed that any reductions to the ACA will be detrimental for the not-for-profit healthcare sector, particularly in states that have expanded Medicaid.

"Those that currently receive healthcare insurance under expanded Medicaid would likely become bad debt or charity for provider organizations," Fitch said.

S&P said for-profit hospitals will also see rising numbers of uninsured patients, bringing higher levels of uncompensated care and pressuring margins, "but most likely not as bad as tax-exempt hospitals because they typically operate in markets that tend to have a more commercially focused payer mix."

Hospitals and companies that provide healthcare with mandated coverage under the ACA such as emergency services, mental health, and substance abuse treatment, could also be adversely affected, S&P said.

Health Insurers

For insurers, Moody's predicts that the end of federal funding would be a credit negative because it would eliminate the Medicaid expansion, which accounted for most of the net gain in the insurance rolls.

Ending the ACA would also eliminate subsidies on the health exchanges, making insurance unaffordable for many of the nine million people now getting assistance, Moody's said.

S&P said eliminating the ACA would mean lower revenues and membership from payers' individual and Medicaid businesses.

The elimination of the ACA would allow insurance companies to deny coverage for people with pre-existing conditions, S&P said, and it could also spur interest in short-term, or minimum benefit plans that could help insurers offset the loss of business from the individual markets.

"To the extent these types of policies replace more comprehensive policies, greater bad debt expense for inpatient providers can be expected given the coverage limitations inherent in these policies," S&P said. "Preventative services to the newly uninsured would decline with an expectation that more expensive emergency room care and inpatient care would have to be provided."

Ultimately, S&P said, eliminating the ACA would make health insurance more expensive for the people with chronic conditions, which could result in more medical-expense driven personal bankruptcies.

Historically, uninsured care costs were taken on by state governments using risk pools and cost-shifting to commercial plans, but S&P says those days are over.

"Employers, in our opinion, are increasingly unwilling to pay those costs," S&P said. "The current array of insurance products already requires consumers to pay more for their healthcare, which reflects a combination of rising costs for employer-based health insurance and employers' desire to pay less."

"This is not a new trend, but we believe it would be exacerbated by elimination of the ACA," S&P said.

State & Local Government

States that expanded Medicaid under the ACA would likely revert to prior eligibility levels and eliminate ACA-related spending, Moody's said.

"Although many states have 'poison pill' language in their Medicaid expansion laws that would eliminate expanded state coverage if the federal law is struck down, they nonetheless would face political pressure to help their expansion populations," Moody's said.

S&P noted that the loss to states of billions of federal dollars for Medicaid expansion would represent a significant cost increase for states hoping to maintain coverage for the expansion population.

"Furthermore, we expect the withdrawal of federal funding flows would have an incrementally negative impact on regional economies, which are already poised to see economic deceleration as the effects of the fiscal stimulus from the tax cuts begins to fade," S&P said.

Longer-Term Outlook

The three bond rating agencies all believe that O'Connor's ruling will be overturned on appeal, either in the 5th Circuit Court in New Orleans, or in the U.S. Supreme Court, which upheld the constitutionality of the ACA in 2012 and 2015.

"Ultimately, we believe the ACA will survive through the appeals process as it has survived other challenges in the Supreme Court," Fitch said. "However, renewed debate on the ACA will generate further uncertainty for healthcare providers and the general public alike."

Longer term, if the ruling is upheld, S&P said it has "the potential to change the direction of the current efforts to reform the U.S. healthcare delivery system fundamentally."

"Given the makeup of the incoming Congress, we think it is highly unlikely bi-partisan compromise could be reached on such a large subject, one that amounts to one-sixth of the U.S. economy," S&P said. "In our view, the demise of the ACA would become the number one issue in the 2020 presidential election."

“Renewed debate on the ACA will generate further uncertainty for healthcare providers and the general public alike.”

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.


KEY TAKEAWAYS

Fitch, Moody's and S&P see rough times ahead for the healthcare sector if Judge Reed O'Connor's ruling is not thrown out on appeal.

The loss of billions of dollars in Medicaid expansion money would harm hospitals, insurers and states.

Employers and commerical plans no longer willing to shoulder cost shifting for bad debt and charity care.


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