More Medicare Reform, More Struggling Hospitals

With Medicare and Medicaid already caught in the cross hairs of the debt ceiling crisis, it now seems that putting Americans back to work has the potential to put some hospitals out of business, and to force an even swifter consolidation of the industry.

President Barack Obama’s $447 billion American Jobs Act bill, which he urges Congress to pass “right away” in order to “jolt an economy that has stalled,” takes aim at Medicare and Medicaid. "Now, I realize there are some in my party who don’t think we should make any changes at all to Medicare and Medicaid, and I understand their concerns," Obama said last week. "But here’s the truth: Millions of Americans rely on Medicare in their retirement. And millions more will do so in the future. They pay for this benefit during their working years. They earn it. But with an aging population and rising health care costs, we are spending too fast to sustain the program. And if we don’t gradually reform the system while protecting current beneficiaries, it won’t be there when future retirees need it. We have to reform Medicare to strengthen it."

The battle cry for Medicare and Medicaid reform is one that politicians have been shouting for years, and that is unlikely to change with the 2012 election on the horizon. In fact, Medicare and Medicaid rates have been reduced and then reinstated at the eleventh hour by lawmakers for years. What has put this political pawn into real jeopardy in recent months is the debt ceiling crisis, high unemployment nationwide—with benefits about to expire—and an economy that continues to show few signs of rebound.

As healthcare leaders know well, the Patient Protection and Affordable Care Act already calls for Medicare and Medicaid reimbursement cuts, while the recent debt ceiling crisis brought the possibility of even steeper rate reductions. Hospitals and health systems have already braced for the first round of rate reductions, but at organizations with payer mixes dominated by Medicare and Medicaid, further reductions would increase charity care and bad debt to such a degree that some facilities could be left teetering on the financial edge.

Moreover, additional rate reductions could cause institutions with a poor payer mix to see another drop in their credit ratings, decreasing their ability to raise capital from commercial lenders. In a July Moody’s Investor’s Service report, “Medicaid Funding Cuts Add to Credit Strain for U.S. Not-For-Profit Hospitals,” the ratings agency gave U.S. not-for-profit hospitals a negative credit outlook overall. The agency points to “government funding cuts in the Medicare and Medicaid programs” as a major driver for its decision.

“State government budget pressures caused by the great recession of the late 2000s, the slow economic recovery that has followed, and the recent expiration of federal stimulus funding are placing downward rating pressure on U.S. not-for-profit hospitals that rely heavily on Medicaid. We expect Medicaid funding pressures will significantly stress hospital credit quality for at least the next several years,” the report says.

The ratings agency notes that these reimbursement cuts are made worse by the difficulties that hospitals and health systems have had generating revenue growth. Moody’s reports that the preliminary median revenue growth rate for nonprofit hospitals was 4.2%—the lowest rate in more than a decade and a sharp decline from the 2009 rate of 6.5% and the 2008 rate of 7.0%.

“Revenue growth has been stymied on numerous fronts: declines in patient volumes, higher levels of uncompensated care, less favorable contracts with commercial payers, and, most significantly, reductions in federal Medicare reimbursement rates, a challenge which we believe will likely intensify given ongoing federal budget challenges. Medicaid reductions are creating yet another strain on top-line revenue growth that hospital management teams must address,” the report states.

Tripp Umbach, a firm specializing in economic impact studies, released a new analysis late last week saying that a 2% cut in Medicare will translate to a projected loss of approximately $41 billion over the next 10 years for hospitals.

“By 2021, this could lead to more than 194,000 jobs lost,” their study says.

With no plan laid out as yet for how the American Jobs Act would be funded, it’s hard to say with certainty what will happen next. A "more ambitious deficit plan" is set to be released today that would "not only cover the cost of the jobs bill, but stabilize our debt in the long run,” the President says.

From my perspective, though, if even steeper Medicare and Medicaid cuts find their way through Congress, healthcare leaders nationwide can expect to see struggling organizations pushed to the brink or even to bankruptcy, along with an even greater spate of mergers, acquisitions, and joint ventures. The consolidation of healthcare is a certainty at this point. How swiftly it will takes place, however, depends entirely on the speed and size of the cuts lawmakers make to Medicare and Medicaid.