Not-for-profit hospital operating margins would drop by roughly 29%, on average, should Medicare reimbursement decline by 2%, according to projections by Fitch Ratings.
Medicare cuts would sock not-for-profits: Fitch
The rating agency analyzed revenue from public and private insurers for 290 tax-exempt hospitals with credit ratings from Fitch. Analysts then projected the change in revenue and operating margin for Medicare cuts that ranged from 1% to 5%.
The average 2010 operating margin for hospitals rated by Fitch was 2.6%. On average, operating margins would drop to 1.8% should Congress fail to approve an alternative to automatic deficit-reduction cuts that could curb Medicare spending on hospitals by as much as 2%. The Joint Select Commission on Deficit Reduction has until Thanksgiving to propose an alternative for Congress to consider.
Fitch said projections did not factor in possible hospital expense cuts or other measures to offset lost Medicare revenue.
Hospitals with weaker credit ratings would be harder hit by Medicare reductions than those with higher credit ratings, the report said. Weaker hospitals rely on Medicare for a greater share of revenue. Medicare accounted for 43% of revenue for BB-rated hospitals compared with 33% among the strong AA-rated hospitals, according to the analysis. Stronger hospitals also often have larger, more diverse operations and greater leverage with insurers and vendors, the report said.
Hospitals rated BB would see operating margins decline to -1% should Medicare reimbursement drop 2%. That's compared with an average BB operating margin of -0.2% in 2010. Hospitals rated AA would see margins drop to 2.9% under projections compared with the AA average of 3.5% in 2010.
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