Puerto Rico's ongoing fiscal struggles could have negative credit implications for some health care providers on the island.
To date, the downgrade of Puerto Rico's general obligation debt to CCC-minus with a negative outlook, coupled with Standard & Poor's Ratings Services view that a default, distressed exchange, or redemption of the commonwealth's debt appears to be inevitable within the next six months, has not resulted in a negative rating action for the three hospitals in Puerto Rico it rates (Auxilio Mutuo, Iglesia Episcopal, and Ryder Memorial Hospital). However, Puerto Rico's need to preserve liquidity poses risks to the health care sector of the economy.
In Standard & Poor's view, some of the risks for Puerto Rico hospitals that are related, in part, to the economic decline include: potential cuts of 11% to federal reimbursement payments to Medicare Advantage plans that cover the majority of Medicare patients on Puerto Rico; sooner-than-expected exhaustion of a federal grant to fund the Medicaid program; possible reduction of benefits and coverage for private employee health insurance plans; and a decreasing number of doctors practicing on the island, which has led to a shortage of specialists.
Governmental payors (Medicare and Medicaid) fund greater than 60% of island residents. If Medicare Advantage program funds are cut in early 2016, as currently expected, the result could be that covered patients will have higher co-pays for hospital services, which would lead to increased bad debts and weaker financial performance for some health care providers.
The federal funding relationship for Medicaid in Puerto Rico differs greatly from that of the states, in that the commonwealth is capped at the amount of federal reimbursement it is eligible to receive for its Medicaid program. States are eligible to receive ongoing federal reimbursement for their respective Medicaid programs for anyone within the states that qualifies and is enrolled.
Puerto Rico's Medicaid program is currently funded primarily by a one-time federal grant, which is dwindling faster than expected and which will decline at an accelerated pace.
Without additional federal funds, Puerto Rico's Medicaid program could be forced to narrow Medicaid eligibility and, as a result, reduce the number of patients in the program, leading to an increase in the number of uninsured. Last, physicians have already been leaving the island in pursuit of higher-paying jobs on the mainland, a trend that could accelerate in the coming months. As a result, providers will have to pay more for physician services or more services, especially well-paying tertiary services, will also go to the mainland.
Taken together, the combined result of the aforementioned risks could mean that, over time, hospital providers in Puerto Rico could face lower reimbursement revenue from governmental and commercial payors, higher levels of bad debts, and an increased burden of uninsured patients.
Lower utilization could result from decreased patient access if patient benefits are reduced and fewer doctors are practicing; in turn, lower utilization could squeeze hospital operating revenue.
The agency said it will evaluate the effect of any changes to reimbursement revenue, utilization, or medical staff on a case-by-case basis over the next few months, as any negative financial consequences will depend on providers' existing payor mix and medical staff makeup, as well as the federal response to the local economy.
