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Health-Care Reform: The SCOTUS Ruling’s Impact on Providers

In late June, the Supreme Court of the United States (SCOTUS) narrowly ruled that the Patient Protection and Affordable Care Act, commonly referred to as the Affordable Care Act or ACA, was for the most part constitutional. Now that the high court has green lighted this major reform of the nation’s health-care system, we have some answers but just as many questions regarding its impact on providers.

Let’s take a look at the law and the Supreme Court’s decision to determine what challenges and opportunities lay ahead for health-care providers. In particular, how might the ACA, as interpreted by SCOTUS, affect borrowers’ access to capital in the future?

A Sweeping Law and Landmark Decision

The ACA, which was enacted in 2010 and is being implemented over several years, was primarily intended to decrease the number of uninsured Americans-17.1 percent in 2011, according to a Gallup Poll-and reduce the cost of health care over time by making a variety of changes to how providers are paid. It provides both incentives and penalties to employers and uninsured individuals in order to increase insurance coverage. Under the law, the federal government will also expand Medicaid, so that about half of all uninsured people gain coverage. Additional reforms of this far-reaching legislation are aimed at improving health-care outcomes in the United States while increasing the efficiency of health-care delivery.

The SCOTUS decision upheld the ACA’s individual mandate, the requirement for nearly all Americans to secure health insurance, as a constitutional exercise of Congress's taxing power. Because the mandate survived the constitutional challenge, the remaining parts of the law were affirmed, including the requirement that payers insure all applicants regardless of their health status and the prohibition against charging customers more because of pre-existing conditions or demographics.

However, the Court ruled that states must be allowed to opt out of the ACA’s Medicaid expansion without losing their pre-existing funding. It remains unknown how many states will participate in the Medicaid expansion or establish their own insurance exchanges, but a number have already expressed their intention to decline one or both of these opportunities.

Impact on the Industry

The immediate effects of the SCOTUS ruling on the health-care sector have not been dramatic. For the most part, the decision 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 uncertainty generated by the pending SCOTUS decision, the private sector had been preparing, albeit slowly, for the eventual enactment of the ACA. With resolution of the constitutional issue, the attention now turns to the November 2012 elections and whether any change in the White House or the Congress could again leave Americans wondering what to do about their health coverage.

Notwithstanding the unsettled nature of the political situation, health-care providers understand that their former ways of doing business are bound to change no matter what happens 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 Systems

As the ACA’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. ACA 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 payer 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 payers 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, e.g., 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 Facilities

Impending 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 health-care 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 to reduce hospitalizations.

Access to Capital
At present, the Supreme Court’s decision appears to be bringing 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 was Kennedy Health System of Cherry Hill, N.J. The 596-bed, multi-campus hospital took advantage of the strong health-care 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.

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.

The ACA has ramifications for all aspects of the health-care sector as well as the broader economy. However, with a careful understanding of and preparation for this historic piece of legislation, health-care providers will be better prepared for the impact of health-care reform on their financials and future access to capital.

Peter A. Pavarini is a health law partner with the global firm of Squire Sanders (US) 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 peter.pavarini@squiresanders.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 mlindsay@lancasterpollard.com.

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