Not-for-profit hospitals’ progress in recovering from COVID-19-inflicted wounds prompted S&P Global Ratings to move its outlook on the sector to stable from negative.
The U.S. Supreme Court’s affirmation of the Affordable Care Act last week also contributed the rating agency’s change in its view and S&P in a separate report said the decision removes one potential threat to state’s COVID-19 recovery.
S&P had moved the healthcare sector’s outlook to negative from stable in March 2020 as the pandemic’s threats accelerated and the extent of the strains and impact on margins was uncertain. The negative view was affirmed in January. Following the change Wednesday, S&P views all U.S. public finance sectors as stable with the exception of higher education.
CARES Act aid from the March 2020 package and subsequent relief over the last 15 months limited the fiscal damage and helped hospitals manage it. “Currently around 85% of our rated healthcare organizations carry stable or positive outlooks, which further supports our decision,” S&P said.
The view factors in continued use of vaccinations, no meaningful disease surges nationally, and the lack of any new mandated shutdowns of elective procedures, which was the case early in the pandemic to allow hospitals to deal with surging cases.
“The revision reflects a trend of revenue recovery, ongoing balance sheet strength, and proactive management teams' focus on maintaining financial stability,” S&P said. “While there are still meaningful headwinds in the sector, we believe the risk level has declined and is consistent with prior years when the outlook was stable.”
Hospitals have shown resilience and the ability to manage capital spending against cash flow. They have adapted to the new environment, learning to manage both routine care and COVID-19 patients, which has allowed volume and revenue to steadily return.
The nation’s rosier economic outlook bolstered federal relief and the ACA decision also contributed to the change in view.
“The ACA appears to be safe for the near term following the recent Supreme Court ruling in California v. Texas,” S&P said. ”States and individuals were further aided by the economic recovery and federal stimulus funds through the American Rescue Plan, which has contributed to stability in many state Medicaid programs.”
The nation’s high court last week rejected a challenge that sought to void the entire package known as Obamacare preserving the legislation’s Medicaid expansion for low-income citizens.
S&P in a separate report said it views the decision “as credit neutral for states” as it leaves intact existing funding structures. But an adverse ruling that overturned parts or all of the ACA could have impacted state credit profiles as it would have posed new challenges to state management of Medicaid costs.
The ruling “provides relative stability in the shared federal-state funding framework established in the ACA, particularly for Medicaid,” S&P wrote in a special commentary. “Given that Medicaid represents a substantial, non-discretionary cost within most state budgets, averaging close to 30% of total spending, the uncertainty could have proven disruptive.”
The lawsuit, filed by a Texas-led coalition and later supported by the Trump administration, argued that a Republican-led Congress rendered the ACA’s individual mandate unconstitutional when in 2017 it eliminated the penalty for forgoing coverage. A federal district judge in Texas sided with the plaintiffs. More than 20 states filed a countersuit and petitioned the Supreme Court to hear the case and appeal. The cases were merged ahead of oral arguments before the Supreme Court last fall.
The justices in a 7-2 opinion that overturns a lower court decision did not address the validity of the
“While we view the implications of SCOTUS' ruling as credit neutral, a future decision that changes the existing funding framework could have far-reaching consequences for states credit given the size and scope of Medicaid,” S&P warned. “If the linkage between funding and ACA-eligible enrollees were to ever weaken, states would face a difficult policy choice of whether to maintain benefits and coverage above federal funding caps for the expanded population.”
The ACA has now withstood three constitutional challenges and backers are hoping the latest ruling will help stave off future GOP challenges.
At least 38 states and the District of Columbia have expanded Medicaid covering more than 15 million adults under age 65 made eligible under the provisions of the ACA. Net federal subsidies for expanded Medicaid coverage in the federal government fiscal 2021 are projected at $95.3 billion, or roughly 22% of total federal Medicaid program spending, according to the Congressional Budget Office.
“Without additional federal-level support under the ACA, the broader cost implications for states maintaining ACA-eligible coverage would be stark both during economic downturns when enrollment — and Medicaid costs — increase and over time given an aging of the U.S. population,” S&P said.
In 2020, state contributions accounted for 36.3% of total Medicaid spending. State-only Medicaid spending as a share of adjusted state expenditures accounts for the second largest state general fund expenditure item at about 15.1% of adjusted expenditures behind public school education.
States have reaped the benefits during the COVID-19 pandemic. Medicaid and the Children's Health Insurance Program enrollment grew by nearly 9.9 million or 13.9% through January.
The CARES Act last year temporarily raised the Federal Medical Assistance Percentage, or FMAP reimbursements to states by 6.2% and it’s expected to continue through December 2021 providing “an important funding boost to states to prevent more-damaging budget cuts as they manage the public health emergency and contend with higher Medicaid enrollment,” S&P said.
The credit test for state will come as the higher federal reimbursement levels taper off. “State finances and by extension credit quality could however face pressure as the flow of extraordinary federal aid to states winds down,” S&P said.
