Proposed Cuts to Medicare and Medicaid Stress Beleaguered Hospitals

Proposed Cuts to Medicare and Medicaid Stress Beleaguered Hospitals

On 13 February, US President Barack Obama released his proposed 2013 budget, which included cutting more than $360 billion from Medicare, Medicaid, and other health programs over the next 10 years. If adopted, the cuts would reduce reimbursement to hospitals. Hospitals would once again have to find additional expense savings or new sources of revenue to avoid the credit negative deterioration of profit margins.

Most hospitals have been adjusting to negative credit trends since 2008, and many have improved their quality and efficiency substantially. But past operating savings reflect harvesting “low-hanging fruit,” while future savings will be harder to achieve and will require more wrenching change.10
US not-for-profit hospitals generally have very high exposure to government reimbursement, with Medicare and Medicaid constituting over 55% of total gross median revenue.EXHIBIT 1 Ratings tend to correlate with exposure to these government programs as these programs do not pay as well as commercial payers, with lower rated hospitals having greater reliance on Medicare and Medicaid on a median basis. For example, as Exhibit 1 illustrates, Aa-rated hospitals have a payer mix that includes 39% from Medicare. A and Baa-rated hospitals’ exposure is 43% and 44%, respectively. Further cuts to Medicare will disproportionately affect lower rated hospitals.

Median Exposure to Medicare by Rating Category

Under healthcare reform, reductions to Medicare rate increases are already in their second year, with the third year of adjustments scheduled to be announced in August and implemented in October. The Obama administration’s 2013 budget would add additional rate pressures. Proposed reductions in Medicare, totaling $268 billion, include cuts to graduate medical education, changes in critical access designation, reduced payments to critical access hospitals, reduced payments for bad debt and reductions to annual Medicare rate adjustments. In January, the Medicare Payment Advisory Commission released a non-binding recommendation that puts the rate increase for 2013 at approximately 1%, which is below the rate of inflation, and therefore represents a rate decrease in real terms (see Exhibit 2). In light of the president’s budget, it is possible the final recommendation will be lower still.

Annual Medicare Rate Adjustments

The proposed budget also enumerates $52 billion in cuts to the federal portion of Medicaid. Changes to Medicaid would include replacing the current Medicaid payment formulas with a single matching rate specific to each state, rebasing Medicaid disproportionate share payments, and limiting federal matches for provider tax payments. States use the provider tax, which they levy on hospitals, to draw down matching federal funds, which are then generally redistributed to hospitals, providing them ultimately with greater income. A limit on federal matches for provider tax payments would be a significant development, as these programs have proliferated significantly over the past several years, and receive on a combined basis an increasing amount of federal support. Prior to 2008, 15 states operated provider fee programs. Today, this number has grown to 33, with another three states considering a program. These programs most benefit hospitals with high exposure to indigent populations and their elimination would negatively affect those hospitals the most.