The Patient Protection and Affordable Care Act, the transition to value-based payment models and other significant industry changes have had a notable impact on hospitals and health insurers so far this year, according to a report from Moody's Investors Service.
Moody's has observed the following three key trends that have affected for-profit and nonprofit hospitals and health insurers so far in 2014 and will likely continue to have an impact going forward.
1. PPACA insurance coverage expansion drives down for-profit hospitals' bad debt. Many of the PPACA's health insurance coverage expansion provisions — such as the individual mandate, public exchanges and Medicaid expansion — took effect this year. The subsequent drop in the uninsured rate is reducing bad-debt expenses for hospitals. For instance, Nashville, Tenn.-based Hospital Corporation of America has reported its self-pay and charity-care adjusted admissions decreased to 6.8 percent in the second quarter of 2014, compared with 8.1 percent the previous year. Other for-profit hospital operators also expect this trend to continue. Franklin, Tenn.-based Community Health Systems anticipates its self-pay adjusted admissions will drop from 8 percent to 4 percent during the next three years because of the shrinking uninsured population, according to Moody's.
2. Nonprofit hospital merger and acquisition activity levels remain high in response to payment reform. This year, nonprofit hospitals have continued to initiate transactions to increase their market share and up their leverage in negotiating rates for risk-based contracts, according to Moody's. Well-managed M&A activity is a positive financial development for hospitals long-term, since it allows them to gain efficiencies and eliminate duplicative expenses.
Merger activity is also going beyond larger organizations acquiring smaller hospitals to include deals between health systems meant to create clinical efficiencies and a larger regional presence. One example of this type of deal is the $3.8 billion merger of Beaumont Health System in Royal Oak, Mich., Oakwood Healthcare in Dearborn, Mich., and Botsford Health Care in Farmington Hills, Mich., to create a new nonprofit health system called Beaumont Health. The new health system is now the largest acute-care provider in the Detroit metropolitan area.
Additionally, nonprofit hospitals have also focused on acquiring health insurers as they transition to value-based payments and focus on population health management. For instance, in January, Des Moines, Iowa-based UnityPoint Health finalized an affiliation with Madison, Wis.-based Meriter Health Services.
3. For health insurers, Medicare Advantage enrollment and low medical cost trends compensate for losses on the PPACA exchanges. So far, health insurers have sustained financial losses because of the PPACA exchanges, since the newly enrolled population has initially appeared to be less healthy and use medical services at a higher rate. In response, health insurers have filed for rate increases for their exchange plans in 2015, which will make it even harder to attract healthier enrollees, according to Moody's.
However, the negative financial impact of the exchanges has been offset by positive developments in other areas. Despite concerns that Medicare Advantage enrollment would drop due to payment changes included in the PPACA, Medicare Advantage enrollment grew by 6 percent this year, on part with the 2013 growth rate. Furthermore, although the medical cost trend is expected to rise in 2014 because of various factors such as expanded insurance coverage and an aging population, the CMS Office of the Actuary expects healthcare spending growth to stay below 6 percent in 2014, maintaining a trend of lower-than-expected annual medical cost growth rates since 2009, according to Moody's. This trend benefits health insurers by making pricing more predictable and allowing for more affordable premiums.
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