iProtean—Further Analysis of Impact of Sequestration on Not-for-Profit Hospitals

Many hoped that Congress and the White House would negotiate a combination of revenue increases and spending cuts that would replace the federal budget sequestration that took effect April 1.  Sequestration mandates approximately $1.2 trillion in spending cuts over the next 10 years ($85 billion over the next six months). But legislators and the Administration appear far from agreeing on budget terms that might alter the deficit reduction measures prescribed in sequestration.


The hospital, physician and other provider component of sequestration—a two percent reduction in annual Medicare reimbursement rates over the next 10 years—will have a negative credit impact on not-for-profit hospitals, according to a recent Special Comment from Moody’s Investors Service.  In 2013 alone, the cuts will lower revenues of hospitals, physicians and other providers by $11 billion, according to CMS estimates. Moody’s noted that the negative outlook for the not-for-profit healthcare sector “incorporates the likelihood that the risk of federal healthcare funding cuts will persist beyond sequestration.”


Hospitals hardest hit by the two percent Medicare reduction will be those with “outsized reliance on Medicare reimbursements, especially those that have not budgeted accordingly or made commensurate adjustments to expenditures or other revenues.”  Medicare continues to be the largest source of revenue for most hospitals.  As the population ages and becomes eligible for Medicare, hospitals will see a higher percentage of Medicare patients.  Many hospitals are trying to lower costs enough to breakeven on Medicare and are adopting strategies that focus on increasing efficiency and capturing economies of scale, thus the heated efforts to merge with or acquire other providers (see iProtean’s advanced course, Affiliation and Consolidation Strategies, Part 1, released earlier this month).  Moody’s notes that “sequestration provides further incentives to expedite such strategies.


There are planned and proposed Medicare reductions in the future.  The White House has proposed a new budget with substantial cuts to Medicare (although the cuts would replace the two percent sequestration reduction); this budget isn’t likely to get very far, but it emphasizes the evolving focus on reducing Medicare. Of course, healthcare reform cuts will reduce payments to hospitals by more than $300 billion through 2019.  And the “doc fix” will remain an issue (see iProtean blog, Hospitals Bear Brunt of Impact of Doc Fix. January 3, 2013).


The direct financial implications of lower Medicare reimbursements are and will force hospitals to adopt new strategies for lowering costs.  In addition, there are indirect negative effects for hospitals from sequestration and additional proposed cuts or taxes.  Moody’s Analytics projects GDP will grow at 2.1 percent in 2013, factoring in sequestration, compared to the 2.5 percent that had been expected. The Congressional Budget Office notes that growth in employment could be reduced by as much as 750,000 in 2013 because of sequestration.  These projections signal job losses, which would be a drag on hospitals’ top line revenue growth. Individuals will lose their employer-based commercial coverage and may defer care, resulting in a decline in admissions.

(Special Comment: “The Sequester Series: Medicare Reductions Present New Headwinds for Not-for-Profit Hospitals,” Moody’s Investors Service, April 8, 2013)


To read Moody’s Special Comment in full, look for it under the Resources tab in the upcoming course, Affiliation & Consolidation Strategies, Part 2.  This course features Marian Jennings, Monte Dube, Lisa Goldstein and Dan Grauman and covers analyzing alignment, when mergers go bad, regulatory implications, aligning with physicians, ratings impact of consolidation and assessing the consolidation.


For a complete list of iProtean courses, click here.



iProtean Symposium & Workshop

Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED).  For more information, click here.


For more information about iProtean, click here.