Moody’s Investor Service analysts characterize the current legal challenge to the Affordable Care Act (ACA) as “significant downside risk” if the Supreme Court strikes down federal subsidies for consumers purchasing insurance on the federal health exchange. If it rules in favor of the government, there will be no impact.
On March 4, the Supreme Court heard oral arguments in King v. Burwell, a case that will determine whether federal subsidies are legal in the 34 states that did not establish their own healthcare insurance exchange. A ruling is expected in June. If the Supreme Court rules in favor of the government, there will be no impact. If the subsidies are struck down, there will be various credit effects.
If the Supreme Court rules against the government, Moody’s predicts that:
People in the 34 states that do not have a state-run exchange will drop health insurance because it will be too expensive without federal subsidies. These subsidies cover 72 percent of monthly premiums on average. This will be credit negative for hospitals—fewer patients with insurance means a jump in uncompensated care and bad debt expense.
- Payer mix likely will weaken. That is, there will be more self-pay patients and fewer commercially insured patients.
- Those who choose to keep their insurance coverage (without subsidies) likely will be sicker than average, thus exposing insurers to adverse selection and losses on the exchange products. Insurers will then increase premiums, placing additional stress on the individual insurance market. Ultimately, “we expect that many insurance carriers will elect to exit the individual market in these states.” The share of people receiving subsidies in each state on the federal exchange ranges from 71% to 94% of enrollees. (Legal Challenge to Affordable Care Act Carries Significant Downside Risk for Not-For-Profit Hospitals, Sector In-Depth, Moody’s Investors Service, March 3, 2015)
Hospitals in states that did not expand Medicaid will be most negatively affected by a ruling against the government because the ACA mandates cuts to Medicare payments. The rationale for those cuts was based on the idea that more people will gain insurance coverage through Medicaid or the exchanges.
- So far, hospitals in these states have experienced small improvements in payer mix through a reduction in exposure to self-pay. A negative ruling from the Supreme Court likely will result in an erosion of these payer mix gains. But hospitals will still have to absorb ACA related reimbursement cuts.
Moody’s analysts wrote that if the Supreme Court rules against the government, passing new legislation to allow people to continue to receive federal subsidies is possible, but not likely given the “politically divided atmosphere in Washington.” They also noted that states could establish their own exchanges, but “this would not be a quick, easy or inexpensive solution.”
(iProtean thanks Moody’s Investor Services for permission to liberally quote from its paper: Legal Challenge to Affordable Care Act Carries Significant Downside Risk for Not-For-Profit Hospitals, Sector In-Depth, Moody’s Investors Service, March 3, 2015)
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