Health Care Reform Going Forward: What's the Impact on Providers?
Let's take a look at the law in light of the Supreme Court's landmark decision in June to determine what challenges and opportunities lay ahead for healthcare providers. In particular, how might the PPACA affect borrowers' access to capital in the future?
Impact on the industryFor the most part, the SCOTUS decision and election affirmation was seen as a credit neutral event by the Big Three credit rating agencies: Standard & Poor's, Moody's Investor Service and Fitch Ratings. Although they differ in whether they view the law as positive or negative, the rating agencies generally expect rated borrowers to have sufficient time to manage these reforms with little effect on their credit quality, at least in the near or midterm.
Despite the prolonged uncertainty, the private sector had been preparing, albeit slowly, for the eventual enactment of the PPACA. Healthcare providers understand that their former ways of doing business are bound to change no matter what would have happened in Washington. Of greatest consequence is the expectation that future provider revenues will have less to do with patient volumes and more to do with clinical outcomes, quality and cost efficiency.
Providers that get good results for their patients and keep costs in check stand to be rewarded with performance bonuses, shared savings and other revenue enhancements. Those providers that fail to do these things can expect financial penalties which will affect revenues and ultimately tarnish a provider's credit profile. "Accountable care" may still be gestational in most areas of the nation, but the concept appears to be taking hold and will eventually replace large portions of our existing fee-for-service system.
Hospitals/Health systemsAs the PPACA's health insurance provisions kick in, a drop in the number of uninsured patients could result in a significant reduction in a hospital's charity caseload as well as its bad debt. But hospitals should continue to approach how they bill patients eligible for financial assistance very carefully. The PPACA does not relieve hospitals of the duty not to charge such patients artificially high prices nor does it change the fair collection requirements of prior law.
On average, Medicare and Medicaid patients account for more than 50 percent of the care provided by hospitals. Any expansion of these programs is likely to be a two-edged sword for hospitals. While more patients may end up being covered, declining reimbursement and greater risk-sharing with providers could offset any budgetary gains. Hospitals will need to pay as much if not more attention to their payor mix as well as to how they set and manage rates.
In the pursuit of improved clinical outcomes, growing importance will be placed on preventive health services. Greater clinical and financial alignment between hospitals and primary care physicians will be necessary if payors demand and reward lower cost alternatives to expensive hospital stays.
Hospitals also will increasingly need to provide or contract for a broader spectrum of care to manage population health in their communities. It will no longer be acceptable for hospitals to give their patients a list of post-discharge providers and then leave them to fend for themselves. If a hospital bears some responsibility for what happens to patients after they leave its facility, there will be a continuing duty to see that post-discharge care is provided in the most appropriate and least expensive setting. This aspect of accountable care will provide hospitals with an opportunity to diversify revenue by acquiring other providers along the continuum of care, for example, home health businesses and skilled nursing facilities.
Additionally, in order to maintain their favored status, tax-exempt hospitals will be required to conduct a community needs assessment every three years, then adopt and implement a strategic plan that meets those needs identified by the assessment.
Skilled nursing and assisted living facilitiesImpending reimbursement cuts will threaten profitability as most of the revenues from skilled nursing and assisted living facilities are from Medicare and Medicaid. To reduce costs, the new law also encourages patients to receive home care services, which are less expensive than receiving skilled nursing or assisted living care. To remain profitable, facilities may have to raise prices for private pay patients to offset the losses from government reimbursements.
General recommendations for skilled nursing and assisted living facilities to prepare themselves financially for healthcare reform include changing a facility's business model to diversify revenue streams, bundling services and contracting with larger providers. However, to succeed at accountable care, facilities will need to successfully manage high acuity care at a lower cost and reduce hospitalizations.
Access to capitalBoth the 2012 elections and the Supreme Court's decision on the constitutionality of the PPACA have brought a measure of stability to the bond market as evidenced by an increase in new money issuance. Hospital providers that have delayed capital spending for the past few years are now reconsidering entering a favorable interest-rate market. With an increased appetite from investors for tax-exempt bonds, conditions are favorable for hospitals to achieve a lower cost of capital.
A recent example of this, not long after the SCOTUS decision, was Kennedy Health System of Cherry Hill, N.J. The 596-bed, multi-campus hospital took advantage of the strong healthcare market for rated credits to issue $66 million in tax-exempt revenue and refunding bonds. A part of the proceeds will finance new projects. The market responded positively to the offering, so much so that the hospital obtained improved pricing as a result of high demand. The result was an exceptionally low cost of capital while preserving maximum flexibility for the borrower.
With the outcome of the elections, most market participants anticipate income tax rates going up which has led to a surge in demand for tax-exempt municipal bonds. As evidence of this, municipal bond funds have seen heavy inflows of new money as investors look towards investments with some degree of tax advantage. This anticipated demand for tax-exempt bonds should lead to continued favorable conditions for non-profit hospitals as they look to refinance existing debt or fund strategic projects.
In general, capital will be more available to investment-grade hospitals and health systems and continuing care retirement communities. As health reform progresses, credit ratings may be more difficult to maintain given the anticipated decline in hospital volumes which should result in thinner profit margins. In addition to an organization's credit profile, credit rating agencies will look at quality factors, such as outcomes, much more closely than they have in the past.
Most industry observers agree that the PPACA will have important ramifications for the health care sector as well as the broader economy. Like any landmark legislation, the ripple effects on American society could last for decades. More than ever, decisions made by healthcare providers today require both a sound understanding of the law's financial impact and some reasonable level of confidence that adequate capital will be available to bring about those decisions. Because neither of those prerequisites is a certainty at present, the authors of this article strongly recommend spending time with the rules and regulations now being issued by Washington and applying to them to your particular situation.
Peter A. Pavarini is a health law partner with the global firm of Squire Sanders LLP, based in its Columbus, Ohio, office. He was recently elected to serve as the president of the American Health Lawyers Association in 2014-2015. Mr. Pavarini is the executive editor of the AHLA's ACO Handbook: A Guide to Accountable Care Organizations, 2012. He can be contacted at email@example.com.
Matthew J. Lindsay is a vice president with Lancaster Pollard. He is the regional manager for the Pacific Northwest and is based out of the firm's headquarters in Columbus, Ohio. He can be contacted at firstname.lastname@example.org.
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