If we were to draw two columns — one for winners from the Patient Protection and Affordable Care Act, or PPACA, and another for losers — the word “hospitals” would probably be listed near the top in the winner’s column. Large hospital chains Health Management Associates Inc (NYSE:HMA) and Tenet Healthcare Corp (NYSE:THC), have seen their stocks more than double over the past year, while Community Health Systems (NYSE:CYH) is up around 75%.
Investors flocked to hospital stocks in anticipation of the full implementation of PPACA, commonly referred to as Obamacare. In the minds of many, Obamacare presented a dream come true for helping hospitals to flourish. But could that dream now be turning into a nightmare for the industry?
Pleasant dreams
Many hospitals currently write off large amounts of bad debt when patients can’t pay for services. They also often face competition from specialty physician-owned hospitals that are sometimes accused of cherry-picking the most lucrative patients with generous insurance benefits.
Key components of Obamacare sounded great to hospital operators. Medicaid would be expanded in all of the states to cover more uninsured Americans. The legislation’s employer mandate promised to force all but the smallest employers to provide health insurance with extensive benefits or pay steep fines. Likewise, most individuals not covered by their employers or through government programs would be required to purchase insurance or pay fines. The dream of reducing those huge bad debt write-offs seemed attainable.
Obamacare also prohibited the establishment of new physician-owned hospitals. For ones already in existence, the bill placed restrictions on expansion. While Obamacare didn’t fulfill the wildest dreams of hospitals not run by physicians, it seemed to deliver some pleasant changes to the status quo.
Rude awakenings
The biggest drawback for Obamacare was that hospitals had to go along with $155 billion in Medicare and Medicaid cuts. That wasn’t considered too bad, though, since they would get that money back and then some, with all of those previously uninsured patients gaining insurance. Unfortunately, there have been a few rude awakenings disrupting the dream.
First, the Supreme Court ruled last summer that Obamacare’s requirement that states expand Medicaid was unconstitutional. As of last count, 18 states opted to either not expand Medicaid or are leaning in that direction.
Earlier this month, the White House delayed implementation of the employer mandate that was scheduled to go into effect in 2014. The House of Representatives is also pushing forward with a proposed delay of the individual mandate.
Meanwhile, those Medicare and Medicaid cuts are scheduled to move forward. This has prompted calls by the American Hospital Association to push back the cuts along with the employer mandate, especially since the employer mandate delay “comes at a time when there is significant uncertainty regarding Medicaid expansion.”
What about those physician-owned hospitals? They’re actually making more money under Obamacare. Of the physician-owned hospitals eligible for quality incentives enacted by the law, 75% are receiving higher reimbursement. For hospitals not owned by physicians, 74% received penalties rather than incentive payments.
Nightmares ahead?
Investors are still banking on having millions of newly insured Americans help hospitals’ financial performance. However, the possibility exists that the dreams could turn into nightmares.
Employers have been adding more part-time workers than full-timers, and in some cases, they’re converting their full-timers to part-timers. Paul Dales, senior U.S. economist at Capital Economics, says companies may be seeking to avoid paying for insurance as required by Obamacare
The key to success for Obamacare’s individual mandate is for young Americans who are currently uninsured to buy insurance through health insurance exchanges. That might prove more difficult than initially thought. ADP Research Institute found that only half of young adults with coverage through their employers take advantage of it. ADP’s Tim Clifford says the penalties for individuals who don’t buy insurance are “kind of invisible,” since they aren’t assessed until taxes are filed and are “probably not enough to change behavior.”
Even if we assume that these concerns are overblown and Obamacare results in significantly fewer uninsured patients, hospitals could have another worry. Paul Keckley, executive director for the Deloitte Center for Health Solutions, recently told hospital executives that “there is no scenario, looking forward, where bad debt goes down.”
Deloitte ran multiple models assessing the impact of Obamacare, only to find that the assumption of reduced bad-debt write-offs that many hospitals have counted on could be wrong. A key issue is that an increasingly higher percentage of hospitals’ bad debt actually stems from patients who have insurance. Insured patients with high deductibles often don’t pay what they owe.
Winners column
A potential bright spot remains for some hospitals, though, even if many of the earlier dreams fade away. Obamacare is one of several factors pushing hospitals toward consolidation to achieve efficiencies. Tenet Healthcare Corp (NYSE:THC), for example, recently announced plans to buy Vanguard Health Systems, Inc. (NYSE:VHS). If the deal goes through, the combined organization will include 79 hospitals and 157 outpatient clinics. There has also been buzz that Community Health Systems might buy Health Management Associates Inc (NYSE:HMA).
The efficiencies resulting from consolidation are nice, but an even greater advantage could come from the pricing leverage obtained as a result of larger scale. One study found that hospitals raised prices 40% after mergers that absorbed nearby rivals. Such cost savings and pricing powers could keep large hospitals in the Obamacare winner’s column despite the other issues. Unfortunately, they could add to the loser’s column, too.
The article Could the Obamacare Dream Turn Into a Nightmare for This Industry? originally appeared on Fool.com is written by Keith Speights.
Fool contributor Keith Speights and The Motley Fool have no position in any of the stocks mentioned.
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