Preparing for the debt fallout
Regardless of debt deal, healthcare likely to suffer
The protracted fight in Washington over raising the country’s debt ceiling and cutting its budget has shined a light on a poor federal reimbursement outlook for U.S. hospitals and health systems, regardless of how negotiations unfold.
Healthcare programs are seen as a likely target for officials negotiating a long-term deal to cut federal spending, meaning hospitals and health systems may bear a big chunk of the reductions mandated by any deals that are reached. Congress and President Barack Obama struggled to reach a deal before Aug. 2 on raising the government’s borrowing limit to keep its flow of cash coming and prevent a selective default, a situation where the government was unable to pay all of its creditors.
The possibility that Medicaid and Medicare reimbursement could fall has not been lost on industry executives.
“They’re going to balance the budget on reductions in payments to providers: doctors, hospitals,” said Henry Franey, executive vice president and chief financial officer for University of Maryland Medical System, Baltimore. The system receives about $500 million of its roughly $2.5 billion in operating revenue from Medicaid, he said.
“We are building contingency plans if (cuts) were to occur,” he said. Given that much of the Maryland system’s costs are fixed, Franey said, contingencies mainly center on how the system might cut its biggest variable cost: labor.
System executives are still developing the contingency plan, but should the government not reach an agreement on raising the debt ceiling, default on its debt and potentially not be able to pay Medicare and Medicaid providers, the Uni- versity of Maryland system would work to enact the contingency plan quickly, Franey said.
It’s unclear as to where Medicare and Medicaid would fall in the pecking order among the government’s creditors should a default occur. “What we’re looking at is unprecedented,” said John Nelson, a managing director for Moody’s Investors Service, New York.
Even if a deal is reached that avoids that scenario and salvages the federal government’s triple-A rating, such an agreement would probably include at least some reduced federal payments to those programs, said Martin Arrick, managing director for Standard & Poor’s. “It’s very clear that Medicare and Medicaid cuts are on the table,” he said.
How that would play out for hospitals’ operations and ability to borrow will depend on the level and timing of cuts.
The added cuts would come as the industry already strains to digest healthcare reform’s provisions and still is suffering from the aftereffects of a recession. “Our outlook for the not-for-profit market has been negative for the past two years,” Nelson said. The industry likely is facing a future where hospitals and health systems will be focused on being more