Fitch Ratings forecasts a negative sector outlook for nonprofit hospitals whose margins will be increasingly challenged by regulatory and political uncertainty, decreased federal funding for states that expanded Medicaid, staffing demands and pressure from risk-based contracts.
Improvement in the labor market and the staffing demand for nurses and mid-level clinical staff has fueled higher salary and benefits costs, Fitch said. The impact is more pronounced in areas with higher levels of hospital competition, population and economic growth.
Fitch said it also expects nonprofit hospital margins to be pressured when the shift to risk-based contracts accelerates.
"The movement toward risk-based contracts by commercial payors is likely to grow around the integrated health systems that have developed in several major metropolitan areas," Fitch said.
Politically, under the Trump administration, states are expected to have more say in Medicaid program requirements. The result could be reduced program funding. Also, renegotiations of supplemental Medicaid funding systems in some states over the next few years could mean payment modifications, Fitch said.
Hospitals are also facing the fallout from federal cuts to Medicaid expansion that were put into place under the Affordable Care Act. States that expanded Medicaid during the first year in 2014 received 100 percent federal financing, a rate that falls to 95 percent this year, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and beyond.
States such as Washington and Connecticut have announced reduced Medicaid reimbursement rates for 2017.
Hospitals in states that expand Medicaid this year would also face such cuts over the longer run, Fitch said.
However, a number of the 19 states that have not expanded Medicaid are showing a willingness to expand their programs after the failure of the proposed American Health Care Act that would have repealed and replaced the ACA, Fitch said.
North Carolina's legislature filed a bill to expand and Maine will put Medicaid expansion to a voter referendum in November. Additional expansion bills reportedly may be introduced in Nevada and South Dakota.
Expansion efforts in four states have failed though, as legislatures in Kansas and Virginia did not pass expansion bills while Georgia and Idaho legislatures adjourned without considering them.
Nonprofit hospitals in states that expand Medicaid benefits would initially realize the fiscal benefits of a sharp decline in charity care and bad debt. Providers would also see higher inpatient and ambulatory volumes driven by newly eligible Medicaid patients.
Past experience suggests that more states will eventually opt to expand, Fitch said. About half of all states established programs within one year after Medicaid was created in 1965. After four years, all but two states had established programs.