Analyst: Health reform law repeal a net-negative for hospitals

(Christopher Furlong - Getty Images)

Earlier Thursday, Moody’s put out a report looking at how for-profit hospitals would fare should the Supreme Court overturn the health reform law. The short answer: Their credit ratings would get slammed.

“The largest impact of repeal is that, if you take away the mandate, you don’t get the coverage expansion expected under the legislation,” says Dean Diaz, a vice president at Moody’s who focuses on for-profit hospitals and wrote the report. “That, in turn, leaves hospitals with increasing uncompensated care costs.”

In discussions about repeal, much of the focus is on health insurance companies. They are, after all, the ones who stand to be most directly impacted by the repeal of a requirement to buy insurance.

But the outcome of the Supreme Court decision matters a lot for hospitals. They have already made significant investments preparing for its implementation — and are hoping the new law would salvage their ailing business model.

Before health reform passed, hospitals were in a financial squeeze. Millions of Americans lost insurance coverage during the recession and made fewer trips to the doctor. Hospitals provided a greater level of uncompensated care, largely in emergency rooms, to those who couldn’t pay their medical bills. Baby Boomers aged onto Medicare, which pays less than private insurance, further shrinking health-care providers’ income. The business model, simply put, looked to be heading off a cliff.

“There was a patient mix shift happening that, unless hospitals changed, they were going to be losing money in about five years,” Chas Roades, chief research officer at consulting firm the Advisory Board Co., told me recently.

Without an individual mandate, that trajectory would likely continue unabated. Here’s how the Moody’s report explains it: “If the law is fully or partially repealed, for-profit hospital operators’ costs of treating patients who can’t pay their bills would rise. That’s because the population of uninsured individuals would remain large and patients would continue to be responsible for an ever larger portion of the cost of care.”

To be sure, there are some parts of the health reform law that hospitals don’t like — and would be happy to see fall. The Affordable Care Act has, for example, already begun dialing back Medicare reimbursements for hospitals that can’t reach certain benchmarks for productivity. All told, the law expects to save $157 billion over the course of a decade from that provision — savings that will come from hospitals’ bottom lines.

Diaz looked at that provision in his report, and a few other changes to how hospitals get paid. And he still came to the conclusion that, all things considered, it’s better for hospitals to have the law standing. A $157 billion cut to Medicare payments is certainly a lot. But it’s also less than half of what hospitals would expect to spend on uncompensated care in the next decade, if trends continued at current rates.

“If the entire law is nullified, you don’t get the expansion but you also don’t get the expansion of coverage but, as a mitigation, you don’t get the scheduled reimbursement reductions,” he says. “At the end of the day, you’re left with this very long term uncertainty of what goes in its place. The status quo can’t continue much longer.”

At the same time, hospitals have already made significant investments in preparing for the Affordable Care Act. They’re learning to become more efficient, so that they can hit those productivity targets in the law. As I wrote in a longer story last month, the health industry isn’t really waiting around for the Supreme Court’s decision. They’re treating the Affordable Care Act for what it currently is: The law of the land.

“There’s no any immediate impact of uncertainty,” says Diaz. “Hospitals have invested, and will continue to invest in, clinical systems that provide greater efficiencies.”

If the law falls now, it could be a bit of a double-whammy: Not only would costs of uncompensated care continue to rise, but all those investments in productivity — catalyzed by the health overhaul — would no longer reap much of a financial reward.