Medical Bad Debt Could Spike if Supreme Court Strikes Down Individual Mandate

If the U.S. Supreme Court strikes down the individual mandate portion of the Affordable Healthcare Act, for-profit hospitals will bear the largest financial brunt, Moody’s Investors Service reports.

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Bad debt, which averages 10 percent of revenues at for-profit hospitals, will expand. “Uninsured individuals enter the healthcare system through the emergency room and often wind up being admitted to the hospital and amassing bills they may not have the means to pay,” writes Moody’s. “The pain of treating a large and possibly expanding population of uninsured patients would be felt by all for-profit hospital operators,” but the biggest impact would be borne by those that operate emergency rooms.

The Moody’s report reinforces the concerns raised by Wall Street and others after three days of arguments in March before the Supreme Court.

Lawyers debated several provisions of the 2010 health care reform law, but the so-called “individual mandate,” which will require 49 million to obtain health insurance, is the most disastrous should it be found unconstitutional, Moody’s writes. The court is expected to render a decision in June.

Without the individual mandate provision, “the number of uninsured individuals would likely continue to increase as the rising costs of healthcare cause employers to stop offering health coverage or shift a larger share of the costs onto employees through increased premiums and co-payments,” writes Moody’s. Uncompensated care cost — that is, the cost of treating patients who can’t pay their bills — will negatively impact profitability, cash flow, and revenue growth, Moody’s writes.

In general, health care organizations have been investing in infrastructure and other improvements aimed at meeting the provisions of the Affordable Health Care Act. “It’s unclear whether operators will benefit from all of the investments they’ve made,” Moody’s writes. “If all or part of the healthcare law is repealed, it’s unclear whether the for-profit hospital operators will see a return on all of the investments and strategies they’ve put in place to operate in a post-healthcare-reform environment. The transition to electronic medical records and enhanced clinical systems should bring efficiencies that translate indirectly into financial gains. But benefits from the employment of physicians and acquisitions of physician groups and clinic operations may be less certain or take longer to realize.”

Should the Supreme Court strike down the individual mandate, something will have to be done, for the current health care system is unsustainable. “Healthcare costs continue to rise, making affordable access to care, even for those with insurance coverage, more and more scarce,” writes Moody’s. “Further, the increased focus on reining in federal spending and reducing the federal deficit will — sooner or later — have to target Medicare as that program accounts for a significant portion of the US budget.”

The report, “US For-Profit Hospitals: Repeal of Healthcare Law Would Raise Costs and Squeeze Revenues, Profit Margins,” is available to Moody’s subscribers. Contact Moody’s Investors Service for more information.

 

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