iProtean—Implications of the Supreme Court Decision

Last week the Supreme Court ruled that the Patient Protection and Affordable Care Act (ACA) is constitutional.  The ruling should reduce some uncertainty among hospitals as they plan for the structural reforms in the law.  But the ruling on Medicaid expansion, allowing states to opt out, may put hospitals in some states at risk for large pools of people who will not qualify for Medicaid and also may not qualify for subsidies in health exchanges.


The ruling on Medicaid also affects hospitals that have disproportionate share adjustments.  ACA phases out DSH adjustments, in part because of the Medicaid expansion provision of the law, but for states that opt out of the Medicaid expansion, it is not clear how this adjustment will be handled.


The healthcare reform law has many positive features for hospitals: insurance coverage for groups of people that have not able to purchase affordable health plans (dependent children up to age 26, people with pre-existing conditions), the individual mandate that requires people to purchase insurance or pay a tax, employers with 50+ employees must offer health insurance, the Medicaid expansion to 133% of the poverty level in states that opt for this program).


Moody’s Investors Service notes, however, that even though the positive features of the law “should result in a material reduction in uncompensated care provided by not-for- profit hospitals,” reimbursement pressures as a result of the law will remain—$150 billion reduction in Medicare over 10 years—as well as $14 billion in Medicaid disproportionate share funding cuts.   The onus is on hospitals to implement the structural changes  and further reduce their costs to offset the reductions inherent in the law.  (Moody’s Investors Service Special Comment:  U.S Supreme Court Ruling That the Healthcare Reform Law is Constitutional is a Credit Neutral Action for Not-for-Profit Hospitals, June 28, 2012.)


And hospitals should expect even more pressure from the government.  The federal budget deficit is driving lawmakers to find additional savings in Medicare and Medicaid (beyond the healthcare reform law) to help reduce the deficit.


“Despite the Supreme Court’s decision that PPACA is constitutional, the credit profile of the not-for- profit healthcare sector will change further in the coming years as the sector must contend with mounting pressures for policymakers to address the steep federal budget deficit . . .Given the scope of the federal budget deficit, there is considerable pressure on the federal government to reduce Medicare spending, or at a minimum ‘bend the cost curve’ to limit future growth in spending. Regardless of the results of the November 2012 elections, policymakers, regulators, and the healthcare industry will face the need to reform, which we expect will result in considerable Medicare and Medicaid funding changes.  (Moody’s Investors Service Special Comment:  U.S Supreme Court Ruling That the Healthcare Reform Law is Constitutional is a Credit Neutral Action for Not-for-Profit Hospitals, June 28, 2012.)


So, considerable uncertainty remains.


Eric Jordahl (Kaufman, Hall & Associates) and Anjana Patel, Esq. (Sills Cummis & Gross, LLP) address these uncertainties in the iProtean courses Managing Risk and The New Healthcare Business Model.  They discuss the evolution of a new business model and the risks inherent in the structural changes in the reform law.


Eric Jordahl, Kaufman, Hall & Associates

I’ve been working in healthcare finance for about 26 years and I can’t think of another time when we had this level of risk within the industry.


A lot of that hinges on the uncertainty that healthcare organizations are confronting about their core operations and their core strategy.  What is the business model that’s going to come out?  What is healthcare reform going to produce, and there is very much a push pull between taking action today . . . based on your best estimations about it, versus the risks of doing that.  And that really does ripple through thinking about tax-exempt debt or debt and capital structure management activities.


So we’ve seen organizations reducing risk.  We’ve seen them changing the amount of floating rate debt that they have in place.  We’ve seen them changing their derivative structures.  We’ve seen them doing all sorts of things to basically offload or reduce the amount of risk that they hold in their debt structures.  All of it I think is related to trying to position the organization to best respond to those much bigger risks that they see on the horizon in the form of changing operations, changing strategy, are they going to need to do merger transactions, acquisition transactions, are they going to need to increase the amount of partnering with physicians.  If so, what form is that going to take.  Are they going to have to spend dollars in the form of hiring more physicians, employment, different employment models?  Point being, that’s where an awful lot of the focus is right now and I think appropriately so.


We do live in uncertain times and part of what that means or what that requires from our standpoint is boards and management that are very thoughtful about the different risks that they own across their organization and are very careful and prudent about which risks they take on.


Anjana Patel, Sills Cummis & Gross

There are two or three major things that the board should be considering at this point.  One is whether the organization has a readiness assessment plan.  By that I mean whether from a strategic perspective the organization is prepared to implement all or parts of the reform law.


One example is the IT infrastructure.  How advanced is the organization’s infrastructure because as you know, a lot of the reform measures will only be successful if there is substantial IT infrastructure in place.


The other thing that the board needs to be aware of is this potential that if an ACO, for example, is successful, there is a potential for decline in inpatient revenues because by the nature of the ACO we want to prevent inpatient admissions.  We want to have better outcomes on an outpatient basis and in the home setting.  So the board needs to keep in mind that while substantial investment has to made in order to implement reform, and this could be financially a huge outlet of cash, there’s also this balance of trying to decide what to do with inpatient services, how to phase out certain things and prepare or convert beds and services to others whether it’s on an outpatient setting or another type of service.  From a strategic perspective, what may look like an acute care hospital today may look very different five years from now if it’s been successful implementing an ACO.  So I think the board has to as part of this readiness assessment plan, has to keep in mind that there is this potential for declining inpatient revenues, at the same time, substantial cost to implement reform.


The other thing that the board has to keep in mind, as part of the readiness assessment plan is how well your organization works with its medical staff, with other community providers.  What kinds of relationships does your organization have with these potential stakeholders?  That’s an important question because if you’re a small hospital competing within a region with many other hospitals, the better your relationships with your medical staff, with your other community stakeholders, the more likely you are going to have a successful ACO, the more collaborative your approach can be.  So that’s another thing that a board should ask when they’re reviewing their organization’s readiness assessment plan.


And then the last thing to keep in mind for board members is the legal issues.  There are substantial legal issues in implementing healthcare reform, from antitrust laws, the Stark law, the fraud and abuse laws, the IRS.  And the board has to keep in mind that implementing certain strategic initiatives there’s always that compliance issue to deal with and how much risk should be taken.


For a complete list of iProtean courses, click here.


iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Monte Dube, Esq., Lisa Goldstein, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.


For more information about iProtean, click here.