Can Hospitals Survive ObamaCare On Operating Margins Of 2 – 3% ?


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The economic condition of U.S. hospitals is more tenuous than private sector businesses. Citi Healthcare Investment Banking Group reports that hospital operating margins are 2 to 3.8%. These margins are very low when compared to target profits for commercial enterprises.”

ObamaCare, Medicare and Medicaid Policy Working Together to Make Our Hospitals Ecconomically Fragile

Phlly.comHoward Peterson POSTED:  FRIDAY, JANUARY 17, 2014, 6:00 AM FILED UNDER:  HOWARD J. PETERSON
The economic condition of U.S. hospitals is more tenuous than private sector businesses. Citi Healthcare Investment Banking Group reports that hospital operating margins are 2 to 3.8%. These margins are very low when compared to target profits for commercial enterprises.
Three factors will further compromise hospital financial health under Obamacare : downward pressure on payments, disproportionate growth of the Medicaid population and the impact of high deductible plans sold on the insurance exchanges.
Generally, hospitals will experience a decline in their payments for services.  However, their costs will continue to rise regardless of payment levels, reducing hospital profitability as they grow.
Moody’s analytics estimates that the rates paid by insurance plans sold on the exchanges will be 20-30% less than the rates paid by existing commercial insurance plans (e.g., Blue Cross, Aetna, United, etc.).  Medicare implemented a 1.3% reduction in hospital payments in October 2013 and has plans to reduce total payments by $300 Billion through 2019.  The Medicare program will provide no increase in payments for doctor services for 10 years, though hospitals will be responsible to pay for growing salaries and benefits of employed physicians.
Sixty-four percent (64%) of those who have enrolled in Obamacare nationwide are newly Medicaid eligible individuals.  Virtually all hospitals lose money on Medicaid services as a result of its low payment levels. 
Obamacare presumed that insuring more individuals would drive down the use of high cost emergency room services.  To the contrary, studies in Massachusetts and Oregon have found that the utilization of emergency rooms dramatically increases with the expansion of Medicaid.  Emergency room use produces the greatest losses for hospitals.
Obamacare projected that, as more individuals have health insurance, hospitals would  benefit from a reduction in charity care costs.  To understand the actual effect of Obamacare one must look to what occurred in Massachusetts. In 2006, 63% of the Massachusetts citizens chose the plan with the cheapest monthly payment.  These plans have the highest co-payments and deductibles.  So, individuals were, as promised, covered by insurance.  They had an insurance card.  However, the hospitals became liable for the costs of these co-payments and deductibles due from the same individuals who struggled just to pay their monthly premium.  Tufts University Hospital’s actual experience was that bad debts for unpaid co-payments and deductibles went up 1% more than their charity care came down.   The result: everyone has an insurance card yet the hospital received less total money to care for more people.
A similar event is about to occur nationally.  The majority of individuals enrolling in private insurance are choosing a “bronze” plan.  The average deductible is $4,300.  Forty-seven percent of the people who signed up for Obamacare are also eligible for subsidies to pay their premiums.  However, their co-payments and deductibles are entirely separate from monthly premiums.  They are an individual out-of-pocket responsibility of the enrollee. Since many of those covered have to be subsidized to pay their premium, they are less likely to pay their co-payment or deductibles either at all or in a timely manner.  The result for the hospitals will be an enormous increase in bad debt and perilous stress on their cash reserves. 
The collective effect of these factors described above is likely to lead to lower margins, no margins or negative margins for many of our nation’s hospitals.  Declining margins will reduce bond ratings, restrict access to capital and increase borrowing costs.
Ironically, the economic impacts on hospitals described here were easy to predict. If you are among those given to Obamacare conspiracy theories, you might conclude that these actions were purposeful because, ultimately, the only available solution to save fragile hospitals may be the creation of a public, single payer healthcare system.
Editor’s Note: If hospitals operate on margins of 2 – 3%, then one would suppose that a third party reimbursement basis of Cost Plus 12% would be attractive to hospital administrators. However, cost plus strategies could actually drive up health care costs if it were to become a predominate market reimbursement scheme. Therefore, if Cost Plus Insurance garners significant market share, the net effect could be higher medical costs instead of lower costs. When hospitals go bankrupt, the best health insurance in the world may become affordable for many……….Much like UFO Abduction Insurance – Nothing like a good “premium only “policy versus a “claim paying” policy.