Saturday, August 30, 2014
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Obamacare, Medicare and Medicaid policy: working together to make our hospitals economically fragile

The economic condition of U.S. hospitals is more tenuous than private sector businesses. Citi Healthcare Investment Banking Group reports that hospital operating margins are 2 to 3.8%. These margins are very low when compared to target profits for commercial enterprises.

Obamacare, Medicare and Medicaid policy: working together to make our hospitals economically fragile

The economic condition of U.S. hospitals is more tenuous than private sector businesses. Citi Healthcare Investment Banking Group reports that hospital operating margins are 2 to 3.8%. These margins are very low when compared to target profits for commercial enterprises.

Three factors will further compromise hospital financial health under Obamacare: downward pressure on payments, disproportionate growth of the Medicaid population and the impact of high deductible plans sold on the insurance exchanges.

Generally, hospitals will experience a decline in their payments for services.  However, their costs will continue to rise regardless of payment levels, reducing hospital profitability as they grow.

Moody’s analytics estimates that the rates paid by insurance plans sold on the exchanges will be 20-30% less than the rates paid by existing commercial insurance plans (e.g., Blue Cross, Aetna, United, etc.).  Medicare implemented a 1.3% reduction in hospital payments in October 2013 and has plans to reduce total payments by $300 Billion through 2019.  The Medicare program will provide no increase in payments for doctor services for 10 years, though hospitals will be responsible to pay for growing salaries and benefits of employed physicians.

Sixty-four percent (64%) of those who have enrolled in Obamacare nationwide are newly Medicaid eligible individuals.  Virtually all hospitals lose money on Medicaid services as a result of its low payment levels. 

Obamacare presumed that insuring more individuals would drive down the use of high cost emergency room services.  To the contrary, studies in Massachusetts and Oregon have found that the utilization of emergency rooms dramatically increases with the expansion of Medicaid.  Emergency room use produces the greatest losses for hospitals.

Obamacare projected that, as more individuals have health insurance, hospitals would  benefit from a reduction in charity care costs.  To understand the actual effect of Obamacare one must look to what occurred in Massachusetts. In 2006, 63% of the Massachusetts citizens chose the plan with the cheapest monthly payment.  These plans have the highest co-payments and deductibles.  So, individuals were, as promised, covered by insurance.  They had an insurance card.  However, the hospitals became liable for the costs of these co-payments and deductibles due from the same individuals who struggled just to pay their monthly premium.  Tufts University Hospital’s actual experience was that bad debts for unpaid co-payments and deductibles went up 1% more than their charity care came down.   The result: everyone has an insurance card yet the hospital received less total money to care for more people.

A similar event is about to occur nationally.  The majority of individuals enrolling in private insurance are choosing a “bronze” plan.  The average deductible is $4,300.  Forty-seven percent of the people who signed up for Obamacare are also eligible for subsidies to pay their premiums.  However, their co-payments and deductibles are entirely separate from monthly premiums.  They are an individual out-of-pocket responsibility of the enrollee. Since many of those covered have to be subsidized to pay their premium, they are less likely to pay their co-payment or deductibles either at all or in a timely manner.  The result for the hospitals will be an enormous increase in bad debt and perilous stress on their cash reserves. 

The collective effect of these factors described above is likely to lead to lower margins, no margins or negative margins for many of our nation’s hospitals.  Declining margins will reduce bond ratings, restrict access to capital and increase borrowing costs.

Ironically, the economic impacts on hospitals described here were easy to predict. If you are among those given to Obamacare conspiracy theories, you might conclude that these actions were purposeful because, ultimately, the only available solution to save fragile hospitals may be the creation of a public, single payer healthcare system.

Howard J. Peterson, MHA Managing Partner of TRG Healthcare, a national healthcare consulting firm
About this blog

The Field Clinic reports and analyzes health care laws, government policies, and political trends that are transforming the care we receive and the way we pay for it. Read more about our panel of bloggers here.

This blog is produced in partnership with Kaiser Health News, an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health-policy research and communication organization not affiliated with Kaiser Permanente. Portions of this blog may also be found on Inquirer.com and in the Inquirer's Sunday Health Section.

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Robert I. Field, Ph.D., J.D., M.P.H. Professor, School of Law & Drexel School of Public Health
Jeffrey Brenner, MD Founder of the Camden Coalition of Healthcare Providers, Medical Director of the Urban Health Institute at Cooper University Healthcare
Andy Carter President & CEO, The Hospital & Healthsystem Assoc. of Pa.
Robert B. Doherty Senior Vice President of Governmental Affairs & Public Policy American College of Physicians
David Grande, MD, MPA Assistant Professor of Medicine at the University of Pennsylvania
Tine Hansen-Turton Chief Strategy Officer of Public Health Management Corporation
Drew A. Harris, DPM, MPH Director of Health Policy Program at the Jefferson School of Population Health
Antoinette Kraus Director of the Pennsylvania Health Access Network
Laval Miller-Wilson Executive Director of the Pennsylvania Health Law Project
David B. Nash, MD, MBA Founding Dean of the Jefferson School of Population Health
Mark V. Pauly, Ph.D. Professor of Health Care Management, Business Economics and Public Policy at The Wharton School
Howard J. Peterson, MHA Managing Partner of TRG Healthcare, a national healthcare consulting firm
Donald Schwarz, MD, MPH Deputy Mayor for Health & Opportunity and Health Commissioner for the City of Philadelphia
Paula L. Stillman, MD, MBA Healthcare consultant with special expertise in population health and disease management
Elizabeth A. W. Williams Senior Vice President & Chief Communications Officer for Independence Blue Cross
Krystyna Dereszowska A third-year law student concentrating in health at Drexel
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