Sequester cuts manageable for not-for-profits, ratings firms say

Like their investor-owned counterparts, not-for-profit hospitals are expected to weather the impact of sequestration, but that doesn't mean the belt-tightening will be easy.

Medical centers across the country are preparing for April 1, when the 2% payment cut takes effect for Medicare providers. Hospitals are expected to lose $5.8 billion under sequestration—an amount that could lead to job losses and service cuts, state hospital associations warn.

But credit rating agencies say the cuts will be manageable for a sector that has demonstrated a keen ability to manage its costs and find new revenue streams. The cuts will most likely impact hospitals with lower credit ratings, which are more reliant on Medicare payments and have fewer reserves to withstand any hit to their operating margins.

In a report today, Fitch Ratings calculated that for each percentage point cut in Medicare reimbursement, hospitals on average will see a 0.39% decrease in net patient revenue. But that number is something hospitals can absorb by cutting more costs—including personnel, lower margin services and “mission-related activities” such as research and education—and taking advantage of economies of scale in a rapidly consolidating industry.

Standard & Poor's similarly noted in a report last month that not-for-profit systems have built a financial cushion to help withstand the payment cut, and have already budgeted for what essentially will be flat Medicare revenue as sequestration negates most of the 2.8% increase in inpatient payment rates.

Some pre-emptive cost-cutting measures are already being reported as systems across the country say they are monitoring a developing situation and budgeting for reductions in reimbursement and research funds.

In Windsor, Vt., Mount Ascutney Hospital and Health Center said the 2%, or $500,000, cut will force it to close its 25-bed skilled-nursing facility on Sept. 1. For Mount Ascutney, the cut comes on top of a 3% revenue growth cap from the Green Mountain Care Board, a state agency.

The Military Health System is also telling beneficiaries to brace for sequestration—including “an immediate decrease in our research efforts, delayed repairs to facilities and delays in new equipment purchases.”

In a statement on its website, Dr. Jonathan Woodson, assistant secretary of defense for health affairs, also said a civilian furlough could mean fewer available appointments and longer waits at military treatment facilities.