NEW YORK--()--Fitch Ratings believes a recent report by the Office of Management and Budget underscores the need for non-profit hospitals to remain focused on operating efficiency in a declining reimbursement environment. The report estimated that approximately $11 billion would be cut from Medicare spending in 2013 if the sequestration cuts were to go into effect. Automatic spending reductions at the federal level will be implemented on Jan. 2, 2013 if Congress fails to act. Medicare payments to hospitals and doctors would be cut by 2%, and Fitch believes lower rated credits would be affected to a greater degree than higher rated credits, given their generally lower profitability. Medicaid spending would be exempted. Fitch's rated hospitals have generally incorporated a reduction in Medicare reimbursement in their 2013 budget.
While we believe sequestration cuts are likely to be averted or modified, reimbursement reductions for both Medicare and Medicaid is a reality, their magnitude is uncertain. Typically, Medicare and Medicaid account for approximately 60% of a hospital's revenue base, and the funding of these programs is a main concern, given federal and state fiscal constraints.
Fitch does not expect more clarity on funding levels until after the 2012 presidential election in November. However, despite the outcome of the elections, Fitch believes that the fee-for-service reimbursement environment with limited accountability is unsustainable. Those providers that will be able to handle a change in reimbursement levels are the ones that remain focused on operating efficiency, resource allocation, physician alignment, and investment in electronic medical records.
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