Hospital stocks rallied in an otherwise down market Wednesday, buoyed by a hope the Supreme Court might decide the King v. Burwell case in the administration's favor. That would leave insurance subsidies in place for millions who bought coverage through a federally run exchange.
But those same hospitals could come in for selling pressure if the Supreme Court rejects the use of subsidies for health plans purchased through the federal exchange and hospital revenue falls as a result of fewer patients being insured.
A ruling against the subsidies would mean a single-digit percentage hit to pre-tax earnings for the publicly traded chains, analysts estimated.
HCA would see the most significant effect at 3.5% of its estimated 2016 earnings before taxes and other charges, with Tenet following at 2.9%, according to Darren Lehrich, an analyst at Deutsche Bank.
Hospitals in 22 states that did not expand Medicaid and opted for federally run exchanges will be hardest hit, said analysts with Moody's Investors Service in a comment that warned the decision could weaken the credit strength of some health systems and hospitals.
In Texas, which did not expand Medicaid and opted for a federally run exchange, “We've probably got the most or are one of the states with the most to lose,” said John Hawkins, senior vice president for advocacy and public policy for the Texas Hospital Association.
Roughly 1.2 million Texans who purchased subsidized insurance through the exchanges could lose coverage and rejoin the state's uninsured, roughly 1 out of 5 residents. State lawmakers are unlikely to act should the Supreme Court deny coverage, leaving Texas hospitals without revenue from the Affordable Care Act expansion but nonetheless absorbing cuts in the law to Medicare reimbursement.
“I don't think it's fiscally sustainable,” Hawkins said. “It's pretty untenable.”
A Texas Democrat Wednesday announced two bills to create a Texas-operated exchange. One calls for Texas to create an exchange. The second would require Texas to launch its own exchange should the Supreme Court rule against the administration.
Wisconsin hospitals are very concerned but unsure how to respond to the uncertainty created by the latest Supreme Court challenge to the Affordable Care Act, said Eric Borgerding, president of the Wisconsin Hospital Association. "I don't think anyone is sure at this point what to do because we don't know what the implications will be," he said.
Hospitals in another 13 states where lawmakers expanded Medicaid but relied on HealthCare.gov for exchange enrollment will see finances deteriorate to a lesser degree. Meanwhile, the financial strain from an erosion in coverage will be compounded by ongoing reductions to what Medicare pays hospitals under the Affordable Care Act.
Fewer patients have struggled to pay for care with newly subsidized coverage at Ascension Health hospitals, the system's CEO said in a statement. “We are seeing it firsthand,” said Bob Henkel, Ascension Health's CEO, who was not available for an interview.
The system reported more patients with Medicaid and commercial insurance and fewer uninsured patients for the six months that ended last December. That more favorable mix of insurance coverage contributed to the system's 4.5% increase in net revenue per discharge for the period compared with the same six months the prior year.
The system's bad debt dropped 7.7% or $50.5 million in the last half of last year compared with the final six months of 2013. The system's charity care dropped 17% or $53 million during the same period. However losses for poor patients in public programs increased $104 million, or 35%.
Regardless of the ruling, however, the largest benefit from healthcare reform for hospitals is coming from Medicaid expansion and not the exchanges, said Brian Tanquilut, an analyst at Jefferies & Co. Ten million new Medicaid enrollees were previously uninsured compared with 3 million exchange enrollees, he noted.
“A lot of people think the exchanges are the cornerstone of success—and that's not really the case,” he said. Even though investors are reacting to King v. Burwell news, he added, “It's more of a sentiment trade than an actual earnings impact.”
Shares of HCA, Community Health Systems, Tenet Healthcare Corp. and other publicly traded chains popped about 5% Wednesday as the news surfaced that Justice Anthony Kennedy made comments that seemed to indicate he might be doubting plaintiffs' arguments. Kennedy is considered a key swing vote in the case.
He told challengers that he found a “serious constitutional problem" with their argument.
“I think most investors believe that four justices are in the bag (in siding with the administration) so all you need is one,” Tanquilut said. “And Kennedy could be it.”
If the plaintiffs win and subsidies are eliminated for those who did not buy on state exchanges, consumers who purchased exchange plans will likely drop coverage without subsidies that, on average, offset nearly three-quarters of household premium costs.
Not only will consumers leave the markets, but health insurance companies may exit the exchanges as well, said Moody's Investors Service analyst Daniel Steingart. "It's hard to spin that in a good way," he said.
Households that received premiums would see the cost of their coverage increase 256%, analysts with Standard & Poor's said, citing data from the Kaiser Family Foundation.
“The outcome of this ruling has the potential to reverse the declining trend we have observed in the rates of the uninsured across the U.S. and may have broad implications for future health policy,” the ratings agency said in a new report.
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