The Affordable Care Act’s health exchanges have been overwhelmed with last minute sign ups, and the results so far indicate more than seven million enrollees. How this “new” market of insured customers will affect hospitals is the subject of a recent report from Moody’s Investors Service. Highlights from the report appear below.
There are conflicting credit implications resulting from the health exchanges. A positive aspect is expanded insurance coverage. This prediction rests on the assumption that there will be a “significant net reduction” in non-paying, uninsured or poorly insured patients.
A reduction in the number of uninsured was part of the rationale for this component of the ACA. The hospital industry agreed to more than $150 billion in Medicare cuts because it was predicted that the benefits of a greater pool of paying patients would outweigh revenue lost due to rate cuts.
“The key result to watch in coming months is the ACA’s impact on the overall uninsured rate. The number of previously uninsured individuals obtaining insurance is a key measure in determining the success of the ACA,” according to the authors of the Moody’s report. They noted that the reduction in the uninsured rate is more important than the total number of enrollees because it is not known how many of those enrollees previously had insurance and simply changed where they buy coverage. They cited a recent Gallup poll showing a decrease in the uninsured rate from 17.1 percent in the fourth quarter of 2013 to 15.9 percent in early 2014 as “an encouraging sign.”
Emerging Risks for Hospitals
Insurance through health exchanges poses three risks for hospitals:
- Today’s high deductibles are tomorrow’s bad debt. Plans with high deductibles will partly offset the benefit of expanded insurance coverage because low and moderate income patients are less likely to pay them in full.
High deductible plans have been responsible for an increasing share of bad debt expense in recent years. Insurers use these products to limit premium growth, but because they transfer greater financial risk to policyholders, they expose healthcare providers to bad debt.
The authors said they believe there is significant risk that people covered by the most popular insurance plans will be unable or unwilling to meet their deductibles. This means the growth in insurance coverage may not actually lower bad debt exposure for many hospitals.
- Lower insurance company profitability on the exchanges may lower hospital reimbursement in 2015. In addition, premiums for plans offered on the exchanges may rise in 2015, causing some to drop coverage and further erode benefits to hospitals.
Insurance companies will begin pricing policies to be sold on the exchanges in 2015 in the next few months, and negotiations with hospitals will extend through the beginning of open enrollment in November.
Moody’s expects 2015 negotiations between insurers and hospitals to be “dynamic.” The authors predict insurers will seek more reimbursement discounts and hospitals will try to offset discounts through risk sharing arrangements.
In addition, the authors noted there is a strong chance premiums for exchange products will rise in 2015, and this could cause people to select plans with less coverage and higher deductibles, or drop their insurance altogether.
Although insurance companies typically do not break out profitability by segment, Aetna, Cigna and Humana have all announced they expect to earn negative margins on their exchange business in 2014. (For a counterpoint to this argument, see iProtean’s March 26 newsletter post, Investors Expect Insurers to Benefit from Health Reform)
- If narrow networks are successful, hospital reimbursement may drop. In narrow networks, hospitals accept lower reimbursement in hopes of gaining market share.
Most insurance companies on exchanges use narrow networks to control costs and to reduce premiums. If hospitals are left out of the networks, or accept lower rates to gain market share, they run the risk of losing out if the expected increase in volume does not materialize and lower rates can’t cover the hospitals’ fixed costs.
The authors noted, however, that “despite the risks, there are strategies hospitals can adopt in order to succeed under narrow networks.” They can partner with insurance companies to market products that will steer customers to their networks or, as some are now doing, start their own insurance companies “to create proprietary networks designed to compete with insurers directly.” (iProtean experts Dan Grauman and Michael Irwin address insurers as part of the competitive market in the upcoming courses Strategic Responses to the Competitive Market, parts one and two.)
There has been activity on the federal level to curtail insurance companies’ efforts to limit networks, however. For example, a new federal proposal would require health insurers to expand the number of hospitals included in exchange networks, putting a “damper” on the trend of narrow network health plans.
(Source: US Healthcare Reform: Three Risks Reduce Credit Positives for Not-for-Profit Hospitals, Sector Comment, Moody’s Investors Service, March 27, 2014)
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