Supreme Decision - Prohibition of Individual Mandate Would Remove Healthcare Reform's Best Feature...

8/2/2019 Supreme Decision - Prohibition of Individual Mandate Would Remove Healthcare Reform's Best Feature for Hospitals

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SPECIAL COMMENT

U.S. PUBLIC FINAAPRIL 23, 2012

Table of Contents:

SUMMARY 1ELIMINATION OF THE INDIVIDUALMANDATE WOULD ADD TO CREDITPRESSURE FOR NOT-FOR-PROFITHOSPITALS 2CREDIT-POSITIVE FEATURES OFHEALTHCARE REFORM 3MOST HOSPITAL MANAGEMENTTEAMS ALREADY PREPARING FORLOWER REIMBURSEMENT 4LONGER-TERM CHALLENGES LIKELYTO FOLLOW COURT DECISION 4MOODYS RELATED RESEARCH 5Analyst Contacts:

CHICAGO +1.312.706.9950

Mark Pascaris +1.312.706.9963

Vice President-Senior Analyst

[email protected]

NEW YORK +1.212.553.1653

Lisa Goldstein +1.212.553.4431

Associate Managing Director

[email protected]

John C. Nelson +1.212.553.4096

Managing Director-Public [email protected]

Supreme Decision: Prohibition of IndividualMandate Would Remove HealthcareReforms Best Feature for HospitalsLoss of Requirement to Buy Insurance Would Pressure Not-for-Profit Hospitals

Summary

The prospects for the federal governments landmark healthcare reform law remainuncertain. The constitutionality of the Patient Protection and Affordable Care Act (PPACA,also referred to as healthcare reform) will be decided by the US Supreme Court, with adecision expected in June. In the broadest terms, three outcomes are possible: the SupremeCourt rules the entire healthcare law unconstitutional; the court rules the entire lawconstitutional; or the court rules that the individual mandate to purchase health insurance isunconstitutional while upholding the remaining provisions. For not-for-profit hospitals andhealth systems, which account for the vast majority of community hospitals in the US,1 thisuncertainty heightens credit risk in an already pressured operating environment, andcontinues to drive our negative outlook on the sector.2

This special comment focuses on the potential effects of the last of the three scenarios onhospital performance, specifically the extent to which elimination of the individual mandate

would affect not-for-profit hospital credit, and that doing so would be a clear credit negativefor the not-for-profit healthcare sector (similarly, this scenario would be a credit negative forthe for-profit hospital sector

3

A Supreme Court ruling that strikes down the individual mandate while upholding the restof healthcare reform would protect some credit positives for hospital providers even thoughmany wonder if the law is viable without the mandate.

).

If the court overturns the individual mandate, the private health insurance market likelywould weaken under the unbalanced weight of the PPACAs strict provisions to cover allthose who seek insurance without the counterbalancing benefit of a new, largely healthy,

population segment that would be provided under the mandate. This would likely lead to arise in costs for many insurers and hospitals but without a corresponding rise in revenues.Further reforms and changes in funding and regulation would then have to be considered bypolicymakers and industry professionals.

1 According to the American Hospital Association, there are 4,985 community hospitals in the US (excluding Veterans Health Administration hospitals, psychiatric

hospitals, and other specialty hospitals). Of the 4,985 community hospitals, approximately 80% are private not-for-profit or state/local government owned, while

approximately 20% are for-profit. http://www.aha.org/research/rc/stat-studies/fast-facts.shtml2 U.S. Not-For-Profit Healthcare Outlook Remains Negative for 2012,January 2012 (139377)3 Repeal of Healthcare Law Would Raise Costs and Squeeze Revenues, Profit Margins, April 2012 (141094)
mailto:[email protected]://www.aha.org/research/rc/stat-studies/fast-facts.shtmlhttp://www.aha.org/research/rc/stat-studies/fast-facts.shtmlhttp://www.aha.org/research/rc/stat-studies/fast-facts.shtmlhttp://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139377http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139377http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_141094http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_141094http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_141094http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139377http://www.aha.org/research/rc/stat-studies/fast-facts.shtmlmailto:[email protected]


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U.S. PUBLIC FINANCE

2 APRIL 23, 2012 SPECIAL COMMENT: SUPREME DECISION: PROHIBITION OF INDIVIDUAL MANDATE WOULDREMOVE HEALTHCARE REFORMS BEST FEATURE FOR HOSPITAL

Elimination of the Individual Mandate Would Add to Credit Pressure for Not-for-Profit Hospitals

In its entirety, the healthcare reform law is a long-term credit negative for not-for-profit hospitals giventhe hardwired Medicare rate reductions embedded in the law along with new forms of reimbursementmodels (such as bundled payments) that also lower reimbursement to hospitals.4

An estimated 16.7% of the US does not have health insurance.

Some aspects ofhealthcare reform have positive credit implications for hospitals, however. Specifically, the individualmandate is the most credit positive feature of healthcare reform, and its elimination would be a clearcredit negative for the not-for-profit healthcare sector. The requirement for individuals to obtaininsurance, or pay a fine, would result in a significant reduction in uncompensated care delivered byhospitals. It also would improve efficiency in the healthcare system by reducing utilization of expensiveemergency room services. Removing the mandate would make the negative features of reform loommuch larger compared to the remaining positive elements:

5

Medicare and Medicaid reimbursements are likely to be reduced due to features of the reform law,as well as the systemic pressure to reduce spending on most federal budget programs. Healthcare

reform includes more than $150 billion of reduced Medicare reimbursement payments to

hospitals and $14 billion of Medicaid disproportionate share funding cuts, spread over 10 years.

In addition to provisions in healthcare reform, given the extent of the federal budget deficit and

failure of the 2011 Congressional budget super committee, additional Medicare spending

reductions are certain (this is true irrespective of the Supreme Courts decision regarding

healthcare reform). The most vulnerable not-for-profit hospitals and health systems will be thosewith the highest reliance on federal government payers (see Figure 1).

Without the individual mandate,

this large uninsured share of the patient population would likely continue to grow as employerswill be unable or unwilling to bear the growing cost of health benefits. The continued rise in

uncompensated care will reduce hospital margins and suppress debt service coverage, creating

added credit stress in the sector.

Hospitals will receive lower reimbursement from commercial insurers as these payers will be underintense pressure to offset the increase in premiums resulting from the absence of the individual

mandate, which would have allowed insurers to spread the costs of covering the sick among a

broader population, including the healthy.

4 Long-term Credit Challenges of Healthcare Reform Outweigh Benefits for Not-for-Profit Hospitals, April 2010 (124233)5 U.S. Department of Commerce. U.S. Census Bureau. Income, Poverty, and Health Insurance Coverage in the United States: 2009, September 2010. Some estimates

indicate an even higher rate of uninsured.
http://v3.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM124233http://v3.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM124233http://v3.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM124233


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U.S. PUBLIC FINANCE


FIGURE 1

Top 20 Rated Hospitals and Health Systems with Highest Combined Medicare and Medicaid as %of Gross Revenue

Name Rating

Medicare %of GrossRevenue

Medicaid %of GrossRevenue

CombinedMedicare +

Medicaid %

Mission Hospital, TX Baa2 47.2% 32.8% 80.0%

Temple University Health System, PA Baa3 36.0% 41.6% 77.5%

Leesburg Regional Medical Center, FL Baa1 69.0% 7.8% 76.8%

Citrus Memorial Hospital, FL Ba3 68.8% 6.3% 75.1%

Yavapai Regional Medical Center, AZ Baa2 58.7% 15.5% 74.3%

Munroe Regional Health System, FL A3 61.4% 12.1% 73.5%

Fremont-Rideout Health Group, CA A2 47.9% 25.4% 73.3%

Baxter Regional Medical Center, AR Baa2 65.0% 8.0% 73.0%

Yuma Regional Medical Center, AZ A2 48.2% 23.2% 71.4%

Eisenhower Medical Center, CA Baa2 65.7% 5.5% 71.2%

Palisades Medical Center, NJ Ba2 53.9% 16.3% 70.1%

Kaweah Delta Health Care District, CA A3 47.0% 23.0% 70.0%Albert Einstein Healthcare Network, PA Baa1 35.9% 33.7% 69.5%

Touro Infirmary, LA Ba1 51.1% 18.0% 69.1%

Burdette Tomlin Memorial Hospital, NJ (now known asCape Regional Medical Center)

A3 56.0% 13.0% 69.0%

Washington Township Health Care District, CA A3 54.1% 14.8% 69.0%

Monongahela Valley Hospital, PA Baa1 54.6% 13.9% 68.5%

FirstHealth of the Carolinas, NC Aa3 57.2% 11.2% 68.4%

NCH Healthcare System, FL A2 58.5% 9.8% 68.3%

Pikeville Medical Center, KY A3 50.0% 18.0% 68.0%

Source: Hospital reports, Moodys

Credit-Positive Features of Healthcare Reform

If the Supreme Court rules the individual mandate unconstitutional but upholds the rest of PPACA,some of the remaining portions of healthcare reform are credit positives for hospital providers, at leastover the medium term. Specifically, PPACA:

Extends dependent coverage to children up to 26 years of age Requires most employers with 50 or more employees to offer health insurance, or pay a fee,

although many firms are likely to pay the fee rather than provide insurance

Creates state health insurance exchanges, which will provide markets for low and middle incomeindividuals to purchase government subsidized health insurance

Prevents health insurers from denying coverage to those with pre-existing conditions Prohibits rescissions (the practice of terminating existing coverage)


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U.S. PUBLIC FINANCE


Moodys Related Research

Rating Methodology:

Rating Methodology: Not-for-Profit Healthcare Rating Methodology, March 2012 (139274)Special Comments:

Repeal of Healthcare Law Would Raise Costs and Squeeze Revenues, Profit Margins, April 2012(141094)

Long-term Credit Challenges of Healthcare Reform Outweigh Benefits for Not-for-ProfitHospitals, April 2010 (124233)

Outlook:

Outlook: U.S. Not-For-Profit Healthcare Outlook Remains Negative for 2012, January 2012(139377)

Announcement: Moody's confirms US Aaa Rating, assigns negative outlook, August 2011

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.
http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139274http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139274http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_141094http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_141094http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_141094http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM124233http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM124233http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM124233http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139377http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139377http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139377http://www.moodys.com/research/Moodys-confirms-US-Aaa-Rating-assigns-negative-outlook--PR_223568http://www.moodys.com/research/Moodys-confirms-US-Aaa-Rating-assigns-negative-outlook--PR_223568http://www.moodys.com/research/Moodys-confirms-US-Aaa-Rating-assigns-negative-outlook--PR_223568http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139377http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139377http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM124233http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM124233http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_141094http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_141094http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM139274


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U.S. PUBLIC FINANCE


Report Number: 141591

AuthorMark Pascaris

Production SpecialistCassina Brooks

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