In addition to the difficulties people continue to experience when trying to purchase health insurance via the federal exchange/marketplace, hospitals also can expect to weather some difficulties as more people become insured through the federal/state exchanges.
The health insurance exchanges resulted from a provision of the Affordable Care Act. It was anticipated that each state would establish a health exchange where health plans would have to compete for a pool of people they would not normally insure. Premium rates were supposed to be competitive so enrollees would have a wide range of options from which to choose. If a state opted not to establish its own health exchange, its residents could enroll in a federal health exchange. From what has been reported so far, the state-run exchanges have had a relatively smooth start compared to the federal exchange.
It is too soon to tell whether enrollment issues will diminish and people will sign up as expected and according to estimates. This will make budgeting for hospitals difficult for 2014, according to a new Special Comment from Moody’s Investors Service, “Health Insurance Exchanges Are a Modest Credit Negative for Not-for-Profit Hospitals in 2014.”
The Special Comment author, Lisa Goldstein, outlined the exchange-related risk that will strain hospitals’ revenues in 2014. These risks counter the upside benefit of more insured individuals. The risks include:
- Migration of commercially-insured patients to exchange-insured patients with anticipated lower reimbursement rates, uncertain terms and contracts between exchange plans and hospitals
- Expected growth in bad debt
- A timing mismatch between having fewer uninsured and the $155 billion in reduced payment updates and cuts to Medicare and Medicaid disproportionate share (DSH) agreed upon by the hospital industry and the federal government
- Shift in private employers’ practice of providing health insurance to employees: reducing health care benefits, raising premiums for employees, even discontinuing employer-sponsored coverage and requiring employees to purchase insurance through private exchanges (a trend Ms. Goldstein said Moody’s expects will continue).
“We do not anticipate rating downgrades solely due to the advent of the exchanges in 2014. We expect hospital revenue growth rates will come under pressure in 2014 and beyond as enrollment gains traction and exchange plans take a sharpened pencil to hospital reimbursement rates to ensure their profitability going forward. Budgeting and financial planning will be more difficult for hospitals and their boards going forward. Management teams that execute sustainable expense reductions that offset lower revenue growth will see stability or even improvement in their credit ratings.” (Special Comment: Health Insurance Exchanges Are a Modest Credit Negative for Not-for-Profit Hospitals in 2014, Moody’s Investors Service, October 2013)
Ms. Goldstein centered her remarks on what she notes as the two primary risks: the level and composition of enrollment levels and rates.
Enrollment
Enrollment levels and composition are difficult to predict. Enrollment was projected to be about seven million individuals in 2014, but given the initial difficulties it is projected that number may be lower due to general confusion, software glitches, variation in enrollment by state, a relatively low first year penalty for not purchasing insurance, and so forth. However, enrollment levels may be higher than anticipated because of the federal government’s decision to implement an income and coverage verification waiver, making the enrollment process less complicated. Also, open enrollment has been extended March 31, 2013. So, the best guess is that all projections are, well, not all that helpful.
The composition of the exchange enrollment will have an even greater impact than the number of enrollees. Moody’s anticipates that many of the exchange enrollees previously had private insurance, which negates the benefit that would have been realized if all seven million enrollees were uninsured prior to enrollment.
Adverse selection is another risk to enrollment composition. Younger, healthy people may opt out and choose to pay the penalty. This means a larger proportion of those enrolling will have chronic disease or pre-existing conditions. Pre-ACA, the result would have been higher hospital volumes, but not so today. Moody’s expects enrollees will be highly managed by their in-network physicians and hospitals through greater care coordination. Expectations of higher emergency room (ER) volumes may be diminished if ER coverage is not pre-authorized by the physician. Individuals may decline treatment because of high deductibles as well.
Exchange Plans May Pay Lower Rates
Insurance companies that participate in the exchange will likely have low profit margins because of ACA requirements. In fact, many of the larger national insurance companies are not participating at all. Moody’s expects reimbursement levels to hospitals will be lower relative to other commercial rates—a contributing factor to lower revenue growth in 2014 and into the foreseeable future, Ms. Goldstein noted in the Special Comment.
“We expect exchange product rates to range anywhere between Medicaid rates and commercial rates, depending on the market, the plans and the hospital’s market position. Beyond 2014, as enrollment grows and plans become more aggressive in their negotiations, we expect commercial rates and exchange rates will blend, reducing revenues from current levels. As we have seen for several years, pressure on revenue growth is inevitable when lower-paying payers consume more of a hospital’s payer mix.” (Special Comment: Health Insurance Exchanges Are a Modest Credit Negative for Not-for-Profit Hospitals in 2014, Moody’s Investors Service, October 2013)
Moody’s also expects bad debts to put increased pressure on hospital revenues in 2014. There may be significant co-pays and deductibles for new enrollees through the exchange—both for those who previously had private insurance and for those who are purchasing health insurance for the first time. The lowest premium on the exchange typically comes with a hefty deductible and co-pay. Without a clear understanding of this responsibility, it is likely that some will not want to/be able to pay the deductibles/co-pays, resulting in higher bad debts for the hospital/system.
As noted earlier, some of the national insurers have opted out of participation in the exchanges. This suggests that the lion share of insurers providing products will be smaller, newer and less experienced, and may not have the necessary systems to manage the new population of enrollees. They may not have established physician or hospital networks. As a result, hospitals may experience more delays in receiving payments or processing claims. Because it’s a new process, the exchange plans will likely encounter delays in being reimbursed by the federal government.
iProtean subscribers, Part Two of Making Difficult Decisions About Services and Programs: A Portfolio Approach features Lisa Goldstein, Marian Jennings and Nate Kaufman. The Special Comment on exchanges is one of the resources you can access through viewing this course. Look for it later this month!
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