HFMA 2017: ACA repeal bills pose credit risk to hospitals

Whether Republicans’ version of an Affordable Care Act repeal-and-replace bill looks like the House-passed American Health Care Act (AHCA) or the Senate’s Better Care Reconciliation Act (BCRA), it would have a negative impact on the credit ratings of nonprofit hospitals, according to Fitch Ratings.

Fitch’s director of U.S. public finance, Mark Pascaris, told the crowd at the Healthcare Financial Management Association (HFMA) conference in Orlando that, while he could make no prediction about what could change in the legislation in the coming days, the repeal efforts are a “material credit negative” for the hospital sector.

“What we’re talking about here is a number of mechanisms that have resulted in an estimated 23 or 24 million fewer people with health insurance over the next eight to 10 years,” Pascaris said. “That’s all going to result in an increase in charity care and bad debt.”

The expected rise in uncompensated care could be attributed to a number of provisions in the legislation, most prominently the $839 billion in cuts to Medicaid funding in the AHCA and its similar reductions in the BCRA. Pascaris said this would be compounded by the fact neither bill raises Medicare inflationary cost adjustments back to pre-ACA levels.

Fitch does see some positives in the Republican bills. For example, cuts in Medicaid’s disproportionate share hospital (DSH) payments made by the ACA would be restored, resulting in $31 billion in additional funding to hospitals over ten years. Funding would be even more generous in states which chose not to expand Medicaid eligibility.

Some of the other positives Pascaris listed, however, were what the Republican bills keep from the ACA, like children staying on parents’ insurance plans until they turn 26.

“That being said, it is Fitch’s opinion that the AHCA poses notably more credit risk to the sector when compared to the totality of the beneficial aspects of the proposed legislation,” Pascaris said.

How some specific provisions of the Republican efforts could impact hospitals’ credit ratings remains unclear. HealthExec asked Pascaris if the ability for states to waive requirements on what insurance plans have to cover, like maternity care or hospitalization, could impact larger health systems covering multiple states.

“It remains to be seen what will be in final legislation,” he told HealthExec. “I don’t anticipate that would be a specific driver for a rate downgrade.”

Outside of what happens on Capitol Hill, nonprofit hospitals have plenty of other challenges, from Pascaris’ perspective. When it comes to credit ratings, some old adages still apply—like having a large balance sheet outweighing other concerns—but he said the sector will have to deal with pressure in several areas, including tighter Medicare reimbursements, higher out-of-pocket costs for consumers and labor wanting pay increases above inflation.

He predicted mergers and acquisition activity to be “brisk” in 2017, though with some systems focused on affiliations and alignments which don’t involve huge economic considerations. He also said all hospitals need to be devoting resources to transitioning to value-based care, such as making investments in analytics to monitor and report quality data, but the gradual change has created complications for how CEOs and CFOs can improve their hospital’s financial profile.

“Volume still matters,” Pascaris said. “When I started a dozen years ago, volume growth was considered good and (today), that’s not necessarily true as we become more quality-focused and population health-focused.”