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Healthcare reform, value-based pay bolsters credit ratings, for now, experts say

For example, Medicaid expansion states have seen a small increase in credit quality.

Jeff Lagasse, Associate Editor

While reforms tied to the Affordable Care Act have most healthcare providers focusing on quality and efficiency, financial experts say the dramatic change in business model is driving improvement in credit ratings. But worries still persists about just how stable those changes are.

According to Martin Arrick, a managing director at Standard and Poor's, said a number of factors are affecting ratings trends, although the outlook in general appears to improving. S&P had been negative on the healthcare sector a couple of years ago, mostly because of pressure on operating margins, but that outlook has since reverted back to stable.

"We still see pressure on operating margins, but there are two big things," said Arrick. "One is that hospitals have done a good job containing costs and keeping their margins generally solid. Two is Medicaid expansion."

For states that have opted to expand Medicaid under the Affordable Care Act, the move has generally been positive, said Arrick. If hospitals were once getting 5 cents to the dollar for the uninsured, they may now be getting 40 cents to the dollar. In other words, they're getting something rather than nothing.

[Also: Mega insurance deals could affect credit ratings of Anthem, Cigna, Aetna, S&P says]

As a result, Medicaid expansion states have seen a small increase in credit quality. Those who haven't expanded Medicaid haven't been hurt, but their credit quality generally has remained flat.

The picture is complicated, though, and it may be affecting hospitals in unforeseen ways.

"What we're finding with Medicaid is, at the end of the day, even though you went from 5 to 40 cents, it's still not a great payer," said Arrick. "Maybe it covers your variable rate costs, maybe it doesn't. And you are in fact providing more services to them, so your overall payer mix is deteriorating. Maybe your overall commercial isn't going down, but overall, the payer mix is deteriorating. On balance it's positive, but what happens over time? Medicaid is part of your baseline, and the next year when your costs are going up 4 percent, and your Medicaid reimbursement is flat or going up at 1 percent -- it begins to be one more force that's putting pressure on your operating margins."

Sean Cassidy, vice president of value-based care at revenue cycle and population health management company ZirMed, also said the move to value-based reimbursement comes with risks.

"Because providers are now directly incented, via risk-based programs -- such as the Medicare Shared Savings Program, bundled payments, the Merit-Based Incentive Payment System, etc. -- to deliver higher quality at lower cost, a significant proportion of the services they deliver are beginning to have downside risk and upside benefit," said Cassidy. "Assuming these programs create the right carrots and sticks for providers, they should help at least bend the cost curve lower, particularly for the cost of care to seniors, given that the Centers for Medicare and Medicaid Services is driving most of these programs."

[Also: S&P lifts outlook on nonprofit healthcare on Medicaid, M&A activity]

Cassidy said it's uncertain how credit ratings agencies will react to the new reality of a significant percentage of provider revenues being tied to risk. He believes these agencies are beginning to incorporate a number of different factors into their models for how provider organizations are likely to perform as risk-bearing entities. Those factors include quality scores; the degree to which providers  take on risk with commercial payers and perform under such contracts, investments in clinically integrated networks and technology infrastructure, and the maturity of data analytics, among others.

"Just as there are winners and losers under risk-based programs, there will be winners and losers with respect to credit ratings," said Cassidy.

Arrick, who will be speaking on the subject at the upcoming Healthcare Financial Management Association conference in Las Vegas later this month, said that the wealth of cost pressures, even in Medicaid-expanded states, will begin to re-emerge. He likens the expansion to a one- or two-year outlier in a overall weakening operating picture.

"So you get all this different kind of noise in the numbers," he said. "In the end analysis, it's tough to sort out what the real trends are because everybody is affected unequally."

Twitter: @JELagasse

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