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Fitch: ACA Beginning to Hurt Hospitals in States that Opted Out

CHICAGO & NEW YORK--(BUSINESS WIRE)--Nonprofit hospitals and healthcare systems in states that have expanded their Medicaid coverage under the Patient Protection and Affordable Care Act (ACA) have begun to realize the benefit from increased insurance coverage, Fitch Ratings says. We expect providers in states that have chosen not to participate in expanded Medicaid eligibility to face increasing financial challenges in 2014 and beyond.

According to a recent report from the Council of Economic Advisors (CEA), 5.2 million people have gained new insurance coverage through Medicaid or the Children's Health Insurance Program in the 26 states (and District of Columbia) that have participated in the expanded Medicaid eligibility under ACA. Conversely, roughly 5.7 million people that would be eligible for coverage under expanded Medicaid eligibility in 2016 will not have the opportunity to enroll. For providers, the cumulative impact on revenues is substantial. The CEA estimates that states that participate in expanded Medicaid coverage will receive $83.6 billion in additional federal funding from 2014-2016 while states choosing not to expand Medicaid will be giving up approximately $88.1 billion in additional funding over that period. Fitch is beginning to see the beneficial aspects to providers in "expansion states" through improved payor mix and reductions in bad debt in the first quarter of 2014.

Fitch suspects that the benefit of expanded Medicaid coverage has helped hospitals and health systems offset the negative impact of weak volumes and reduced Medicare reimbursement experienced throughout the sector. Year to date, Fitch has downgraded 10 entities. Of those, five are in states that have not participated in expanded Medicaid coverage. Several of those downgrades were driven by operating performance declines related to funding and reimbursement pressures, which may have been lessened by Medicaid expansion. Conversely, of the nine upgrades since Jan. 1, eight were hospitals in states that have expanded Medicaid.

We expect these trends to continue and become more severe after 2014. The reimbursement reductions in ACA will be phased in over time. Hospitals and health systems will continue to feel the brunt of further reimbursement cuts to Medicare payments as well as expected reductions to federal funding of Medicaid disproportionate share in 2015 and 2016.

However, Fitch notes the impact on specific issuers will vary reflecting service area characteristics and demographics. Furthermore, states can chose to participate in expanded Medicaid coverage eligibility annually and/or pursue an alternative Medicaid waiver program. Either choice would likely provide a financial boost to those hospitals and health systems in states that have not currently expanded Medicaid eligibility.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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