Federal Approval of Oklahoma Medicaid Fee Is Credit Positive for Not-for-Profit Hospitals

Federal Approval of Oklahoma Medicaid Fee Is Credit Positive for Not-for-Profit Hospitals

On 17 January, the US Center for Medicare and Medicaid Services (CMS) approved Oklahoma’s application for a hospital provider fee program, which will provide additional funding to help offset the losses incurred by hospitals serving Medicaid and indigent patients. The approval of increased Medicaid payments is credit positive for Oklahoma hospitals, especially given the negative credit factors affecting the not-for-profit hospital sector.23 Most other states have similar CMS-approved provider fee programs and Oklahoma estimates its new program will add $340 million in incremental funding for its hospitals.

Known as the Supplemental Hospital Offset Payment Program (SHOPP), the state provider fee program will begin later this year and expires in December 2014 unless state and federal officials renew it. SHOPP will directly benefit Oklahoma’s hospitals that care for a disproportionally high number of Medicaid and indigent patients, who are typically children and low-income or disabled individuals. High Medicaid dependence puts hospitals at a financial disadvantage because Medicaid reimburses hospitals less than Medicare or commercial insurance companies. On average, Medicaid pays only 72% of Medicare24 for the same services.

SHOPP is a significant step toward equalizing the reimbursement discrepancy faced by Medicaid-dependent hospitals. The program will assess a 2.5% fee on net patient revenues of nearly 80 state hospitals. The collected funds will then be matched at a 2-to-1 ratio by the federal government and redistributed within Medicaid reimbursement among the assessed hospitals and an additional 30 critical access hospitals.

Because Medicaid is a joint federal and state funded program, hospitals are vulnerable to state budget stress. Oklahoma, along with 37 other states, previously cut its Medicaid rates because of its own budget shortfalls. The new SHOPP approval will mean a partial restoration of some of the previously cut state funding. Oklahoma joins 46 other states with some type of Medicaid provider tax program.

Our national 2010 medians for rated not-for-profit hospitals show that Medicaid represents 12.5% of gross patient revenues, a proportion that has been increasing since 2007 amid a slow economic recovery.

Under similar SHOPP-like programs, there are generally winners and losers: some hospitals are net payers to the program, while others are net beneficiaries. However, most of these programs include side agreements among the hospitals in which the net payers are made whole by those that benefit under the program. Government officials said they expect all participating hospitals in Oklahoma’s SHOPP to be net beneficiaries.
As the exhibit shows, within our rated portfolio there are five rated Oklahoma hospitals with a combined $1 billion in rated debt. Medicaid revenues comprise an average of 11.5% in gross patient revenues for these hospitals, which range in operating revenue size from $98 million for Stillwater Medical Center (Baa1 stable) to $1.45 billion for Integris Health Obligated Group (Aa3 stable). The increased net Medicaid payments will be a direct contribution to the hospitals’ operations, which we expect will improve key metrics such as operating margins, operating cash flow margin and debt service coverage measures.