Moody's: Medi-Cal Cuts Credit Negative for Hospitals

A federal appellate court's ruling to uphold California's 10 percent cut to Medicaid reimbursements is a credit positive for the state but negative for its hospitals, according to a report by Moody's Investors Service.

Last month, the 9th U.S. Circuit Court of Appeals ruled in favor of the state's plan to cut $600 million in payments from Medi-Cal, the state's Medicaid program, after an injunction halted the move for two years during a pending lawsuit filed by provider and consumer advocacy groups. Opponents of the cuts can take their appeal to the Supreme Court, but Moody's analysts said the high court is unlikely to hear the case because it sent the matter back to a lower court when an appeal first reached it in 2012.

To reclaim the unreduced payments it has paid during the injunction, California will make 15 percent cuts to Medi-Cal physicians for four years and then shrink the reduction to 10 percent after that. That won't directly impact hospitals, Moody's notes, but will hurt them indirectly as the medical foundations through which hospitals contract physicians will post deeper-than-normal losses, placing a heavier burden on hospitals' financial statements.

The ruling also casts a shadow over Medicaid rates in other states, as the National Association of State Budget Officers estimated Medicaid accounted for 23.9 percent of total state spending in fiscal 2012, up 1.7 percentage points from fiscal 2010, according to the Moody's report. The appellate court's decision may empower other states to cut Medicaid reimbursement rates to shrink Medicaid's growing portion of state budgets.

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