When the cycle turns: Healthcare Subsectors Ranked by Vulnerability to Economic Downturn




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S&P: Hospitals vulnerable to recession as healthcare sector stays defensive

The healthcare sector remains defensive but has become increasingly vulnerable to an economic downturn because of deteriorating ratings, comparatively higher leverage and greater industry disruption, analysts at S&P Global Ratings said in a new report.

Healthcare companies’ issuer credit ratings are becoming more vulnerable to a cyclical downturn in comparison to prior recessions, according to the rating agency, which also said that proposals from the U.S. government are threatening the sector’s creditworthiness.

Credit quality has fallen considerably since the last recession in the healthcare sector — where products and services continue to show a largely inelastic demand — with 66% of healthcare companies carrying B ratings, according to the April 29 analysis.

Ratings estimates that about 20% of for-profit healthcare companies have investment-grade issuer credit ratings, in comparison to 54% in 2005. The rating agency believes this transition shows an increase in smaller and mainly private equity-owned healthcare issuers.

Hospitals among subsectors most vulnerable to economic slowdown

The subsectors most vulnerable to an economic downturn are hospitals, healthcare service providers and hospital staffing services, based on leverage metrics and relatively higher disruption in comparison to other subsectors, the rating agency added.

Ratings analysts said companies like Tenet Healthcare Corp., Prospect Medical Holdings Inc. and HCA Healthcare Inc. would be affected by a potential rise in uncompensated care — with patients opting for lower cost options — since insurance coverage tends to decline as unemployment rates increase during a recession. In addition, healthcare companies such as Acadia Healthcare Co. Inc. and WP CityMD Bidco LLC would be highly exposed to reimbursement rates based on Medicaid and Medicare plans.

The healthcare segment at highest risk in an economic downturn is temporary nurse staffing, which is highly sensitive to cyclicality, more so than part-time physician staffing and full-time employment.

Pharmacy benefit managers, often called the drug middlemen or PBMs, such as CVS Health Corp. and Aetna Health Holdings LLC, which are responsible for negotiating drug prices between drug companies and insurers are also at risk of exposure to a downturn.

The Trump administration wants to end the safe harbor protections, which permit PBMs to collect rebates, by Jan. 1, 2020, and move the U.S. to a fixed-fee discount model.

Ratings analysts believe healthcare companies with a portfolio of research and development, medical devices, pharmaceuticals and biologics manufacturing will be more insulated and can expect steady demand during a recession, which will help achieve astrong revenue base.

Companies like Pfizer Inc., Amgen Inc. and Teva Pharmaceutical Industries Ltd. may be at the receiving end of a slight shift in the sector, which will see customers increasingly preferring lower-cost generic and biosimilar alternatives. In addition, increased usage of high-deductible insurance plans will bolster switches to lower-cost options.

Life sciences companies like Danaher Corp., Thermo Fisher Scientific Inc. and PerkinElmer Inc. mostly see repeat sales of their products, and since there is an increase in the use of diagnostic tests, the life sciences subsector would be more resilient in an economic downturn.

Medical devices companies Baxter International Inc., Abbott Laboratories, Becton Dickinson and Co. and Hologic Inc. should expect consistent demand though there is some exposure to patient and hospital admission volumes.

However, Ratings analysts believe the medical devices subsector “does not have a large target on its back, in terms of cost control, versus the pharmaceutical industry.”

Given the mostly inelastic demand in the healthcare sector, McKesson Corp., Cardinal Health Inc., Owens & Minor Inc. and other such companies in the drugs and medical products’ distribution segment will be largely insulated from the economic downturn, Ratings analysts added.





Financial worries keep hospital CEOs up at night


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Dive Brief:

  • Financial challenges, including increasing costs, shaky Medicaid reimbursement, reductions in operating costs and bad debt, ranked No. 1 on the list of hospital CEO worries in 2018, according to an American College of Healthcare Executives poll.
  • Government mandates and patient safety and quality tied for second place in ACHE’s survey of top issues facing health systems. Workforce shortages came in third.
  • A little more than 350 execs responded to the survey and ranked 11 concerns their facilities faced last year. Behavioral health and addiction issues, patient satisfaction, care access, physician-hospital relations, tech, population health management and company reorganization filled in the remaining slots.

Dive Insight:

No matter which cog in the healthcare system one blames for the skyrocketing costs of healthcare (big pharma inflating the list prices of drugs; hospitals for upmarking services; insurers for leaving gaps in care resulting in surprise bills) consumers’ pocketbooks aren’t the only ones affected.

A separate American Hospital Association-backed study predicted health systems will lose $218 billion in federal payments by 2028, and private payers (whose dollars would normally help hospitals make up the difference) have been curtailing reimbursements as well.

Bad debt was another fear in the ACHE report. Uncompensated care costs peaked in 2013 at $46.4 billion and, though the figures have decreased slightly since then, hospitals shelled out $38.3 billion in 2016. Wisconsin alone was on the hook for $1.1 billion in uncompensated care in fiscal year 2017.

“The survey results indicate that leaders are working to overcome challenges of balancing limited reimbursements against the rising costs of attracting and retaining talented staff to provide that care, among other things,” ACHE president and CEO Deborah Bowen said in a statement.

Other financial concerns included competition, government funding cuts, the transition to value-based care, revenue cycle management and price transparency.

And 70% of hospital CEOs were worried about shifting CMS regulations in 2018, along with regulatory/legislative uncertainty (61%) and cost of demonstrating compliance (59%) — unsurprising, given the current administration’s track record of unpredictability.

Patient safety and quality of care was also top of mind for health system CEOs, with over half of respondents anxious about the high price of medications, involving physicians in the culture of quality and safety and getting them to reduce unnecessary tests and procedures.

Also of interest was the high rank given to addressing behavioral health and addiction issues, according to Bowen, which ranked fifth in its first year of being included in the survey. The topic has been front and center in the industry of late, in line with the increasing recognition of social determinants of health and the breakdown in silos of care.

Ranking of the issues has remained largely constant since 2016, though in 2017 more hospital CEOs were concerned about personnel shortages than patient safety and quality.


AHA: Medicare underpaid hospitals by $53.9B in 2017


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Medicare underpaid hospitals by $53.9 billion in 2017, and Medicaid underpaid hospitals by $22.9 billion, according to the latest data from the American Hospital Association’s Annual Survey of Hospitals.

Underpayment occurs when the reimbursement hospitals receive is less than the amount paid for personnel, technology, and other goods and services required to provide care.

In 2017, hospitals received payment of 87 cents for every dollar they spent caring for Medicare and Medicaid patients, according to the AHA.

Access the AHA underpayment by Medicare and Medicaid fact sheet here.


Coverage expansion and primary care access


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When you have a health problem, your first stop is probably to your primary care doctor. If you’ve found it harder to see your doctor in recent years, you could be tempted to blame the Affordable Care Act. As the health law sought to solve one problem, access to affordable health insurance, it risked creating another: too few primary care doctors to meet the surge in appointment requests from the newly insured.

Studies published just before the 2014 coverage expansion predicted a demand for millions more annual primary care appointments, requiring thousands of new primary care providers just to keep up. But a more recent study suggests primary care appointment availability may not have suffered as much as expected.

The study, published in April in JAMA Internal Medicine, found that across 10 states, primary care appointment availability for Medicaid enrollees increased since the Affordable Care Act’s coverage expansions went into effect. For privately insured patients, appointment availability held steady. All of the gains in access to care for Medicaid enrollees were concentrated in states that expanded Medicaid coverage. For instance, in Illinois 20 percent more primary care physicians accepted Medicaid after expansion than before it. Gains in Iowa and Pennsylvania were lower, but still substantial: 8 percent and 7 percent.

Though these findings are consistent with other research, including a study of Medicaid expansion in Michigan, they are contrary to intuition. In places where coverage gains were larger — in Medicaid expansion states — primary care appointment availability grew more.

“Given the duration of medical education, it’s not likely that thousands of new primary care practitioners entered the field in a few years to meet surging demand,” said the Penn health economist Daniel Polsky, the lead author on the study. There are other ways doctor’s offices can accommodate more patients, he added.

One way is by booking appointment requests further out, extending waiting times. The study findings bear this out. Waiting times increased for both Medicaid and privately insured patients. For example, the proportion of privately insured patients having to wait at least 30 days for an appointment grew to 10.5 percent from 7.1 percent.

The study assessed appointment availability and wait times, both before the 2014 coverage expansion and in 2016, using so-called secret shoppers. In this approach, people pretending to be patients with different characteristics — in this case with either Medicaid or private coverage — call doctor’s offices seeking appointments.

Improvement in Medicaid enrollees’ ability to obtain appointments may come as a surprise. Of all insurance types, Medicaid is the least likely to be accepted by physicians because it tends to pay the lowest rates. But some provisions of the Affordable Care Act may have enhanced Medicaid enrollees’ ability to obtain primary care.

The law increased Medicaid payments to primary care providers to Medicare levels in 2013 and 2014 with federal funding. Some states extended that enhanced payment level with state funding for subsequent years, but the study found higher rates of doctors’ acceptance of Medicaid even in states that didn’t do so.

The Affordable Care Act also included funding that fueled expansion of federally qualified health centers, which provide health care to patients regardless of ability to pay. Because these centers operate in low-income areas that are more likely to have greater concentrations of Medicaid enrollees, this expansion may have improved their access to care.

Other trends in medical practice might have aided in meeting growing appointment demand. “The practice and organization of medical care has been dynamic in recent years, and that could partly explain our results,” Mr. Polsky said. “For example, if patient panels are better managed by larger organizations, the trend towards consolidation could absorb some of the increased demand.”

Although the exact explanation is uncertain, what is clear is that the primary care system has not been overwhelmed by coverage expansion. Waiting times have gone up, but the ability of Medicaid patients to get appointments has improved, with no degradation in that aspect for privately insured patients.

CMS moves forward with $43B in DSH payment cuts


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CMS issued a proposed rule Thursday that lays out a methodology for implementing cuts to Medicaid Disproportionate Share Hospital allotments under the ACA beginning in fiscal year 2018.

With the expectation of lower uninsured rates and lower levels of hospital uncompensated care, the ACA adjusted the amounts of funding available to states under the Medicaid program for hospitals that serve a disproportionate share of low-income patients. The ACA calls for aggregate reductions to Medicaid DSH payments annually from FY 2014 through FY 2020. Subsequent legislation delayed the start of the reductions until FY 2018 and pushed the end date back to FY 2025.

Medicaid DSH allotments are slated to be reduced by $2 billion in FY 2018. The reductions will grow by $1 billion per year through FY 2024, when payments will be cut by $8 billion. DSH allotments will be reduced by another $8 billion in FY 2025.

CMS proposed a methodology that would account for new data sources, some of which were unavailable during prior rulemaking. Those sources include DSH Medicaid Inpatient Utilization Rate data, U.S. Census Bureau data and existing state DSH allotments. “We are proposing to utilize the most recent year available for all data sources and are proposing to align data sources whenever possible,” said CMS.

The proposed methodology would help ensure DSH payments reach hospitals with the most need for financial assistance due to high volumes of Medicaid inpatients and high levels of uncompensated care, according to CMS.

CMS will accept comments on the proposed rule until Aug. 28 at 5:00 p.m.

Florida Blocked From Enforcing Medicaid Reimbursement Law


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Florida can’t enforce a state law that allowed the state’s Medicaid agency to seek reimbursement from patients who received third-party settlements ( Gallardo v. Dudek , 2017 BL 128992, N.D. Fla., No. 4:16-cv-116, 4/18/17 ).

Judge Mark E. Walker of the U.S. District Court for the Northern District of Florida ruled that Florida’s Medicaid reimbursement statute was preempted by the federal Medicaid Act. The court barred the state from using the statute to satisfy any payment lien against a Medicaid patient whose settlement includes payment for both past and future medical bills.

The court’s decision represents a tension that many states face when dealing with Medicaid reimbursement. The Medicaid Act requires the state to attempt to recover money paid for medical expenses to patients whose injuries are caused by third parties. However, the states are prevented from seeking to obtain the entire amount of a third party settlement and are limited to the amounts set aside for medical expenses.

The court cited a U.S. Supreme Court decision from 2006, Ark. Dept. of Health & Human Servs. v. Ahlborn , 547 U.S. 268 (U.S. 2006), which interpreted the anti-lien provisions of the Medicaid Act as limiting a state to a proportional reimbursement, representing that portion of any settlement or judgment that represents past medical bills. However the provision that the supreme court interpreted in that case and that the court relied on in this case could be changing as of Oct. 1.

At least one practitioner told Bloomberg BNA that the change, which has been delayed repeatedly, could result in this Florida statute suddenly becoming legal.

One Size Doesn’t Fit All

At issue in this case was Florida’s recovery law, which established a formula for determining how much of a third party settlement can be sought by the state Agency for Health Care Administration. Under that law, the AHCA can seek either 37.5 percent of the settlement, or the actual amount paid for medical expenses, whichever is less.

The case was brought by the family of Gianinna Gallardo, a 13-year-old girl who was hit by a car and ended up in a persistent vegetative state as a result of her injuries. The AHCA paid about $800,000 for her medical treatments. Gallardo’s parents sued the individual responsible for her injuries in a suit that they valued at $20 million. They settled for 4 percent of the estimated value of the suit, or $800,000

Following its formula, the AHCA instituted a lien on the settlement of $300,000, which represented 37.5 percent of the total amount. The Gallardos challenged the lien, claiming it didn’t reflect a proportional reimbursement and it accessed funds in the settlement, which had been set aside for Gianinna’s future medical bills.

The court agreed with the Gallardos. According to the court, the law’s “one-size-fits-all” formula didn’t match with the supreme court’s decision in Ahlborn and was thus improper. The court said the Medicaid Act only permitted the AHCA to recoup a portion of a settlement that had been designated to cover past medical bills.

Floyd Faglie of Staunton & Faglie in Monticello, Fla., who represented the Gallardo family in the litigation, said his clients were very pleased with the court’s ruling.

“This is a tremendous benefit to the Gallardo family, to Gianinna Gallardo in particular,” he told Bloomberg BNA. “What the court has done is leveled the playing field for people to challenge Medicaid liens asserted against tort settlements and made it fair.”

A representative for the AHCA declined to comment on the ongoing litigation.