The Balanced Budget Act vs. deficit reduction

So what would happen to hospital revenue and operating margins, say, if Medicare revenue fell by 1%? What about 3% or 5%? Ratings agency Fitch considered the question and then compared the results against operating margins after Congress last took dramatic action to curb Medicare spending.

The average tax-exempt hospital would see a 0.4 percentage-point drop in operating margin for every 1% drop in Medicare revenue, according to an analysis of 290 hospitals with Fitch credit ratings.

That would leave the average hospital in Fitch Ratings' portfolio with an operating margin of 1.8% should Congress proceed with the maximum 2% Medicare cut allowed under one deficit-reduction option before lawmakers, according to a new report from Fitch.

Fitch analysts reviewed margins in its portfolio for the past 16 years. The average margin reached its lowest point after passage of the Balanced Budget Act of 1997, which sought to save $160 billion, largely from Medicare.

The average hospital margin dipped as low as 1% in 1999. That's compared with 2.7% the prior year and 3.2% the year the Balance Budget Act was enacted. Credit-rating downgrades, which already lagged upgrades before the Balanced Budget Act, accelerated as the law curbed Medicare spending.

In a conference call to discuss the report, Fitch analyst Adam Kates noted that managed care and the tight labor market as the 1990s closed added to the strain on hospital margins.