Supreme Court ACA decision neutral for not-for-profit healthcare sector

The not-for-profit health sector dodged a bullet with the U.S. Supreme Court’s rejection of a challenge to the federal Affordable Care Act that leaves the status quo intact for hospitals and health systems.

Fitch Ratings called the decision a “neutral” for sector ratings. 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. More than 20 states filed a countersuit and the cases were merged ahead of oral arguments last fall.

The justices in a 7-2 opinion that overturns a lower court decision did not address the validity of the litigation’s arguments over whether the individual mandate is severable from legislation. Instead, the court concluded states lacked legal standing to bring the suit which is known as California v. Texas. Market participants had warned that if allowed to stand, the challenge would have hurt sector ratings.

A decision against the ACA, commonly referred to as Obamacare, would have shaken up the sector as former President Obama’s signature initiative has reshaped healthcare. “Today's ruling maintains healthcare coverage for tens of millions of Americans under the ACA, and we expect this to prevent a decline in operating margins associated with a shift in payor mix that would have reversed the positive margin trend evidenced at hospitals in the years following the ACA rollout,” Fitch wrote in a special commentary.

Bloomberg News

Fitch's not-for-profit hospital median operating margins rose during the years the ACA was fully implemented, increasing to 3% in 2014 and then 3.5% in 2015 from 2.2% in 2013. Operating margins have continued to benefit since then, due to the incremental revenue from patients enrolled in the healthcare exchanges or under expanded Medicaid programs.

Margins suffered last year as hospitals grappled with the impact oF the COVID-19 pandemic on operations, driving up some personal and equipment costs while more profitable elective procedures were temporarily halted to focus on treading pandemic patients.

Rated hospitals saw a significant decrease in self-pay during 2014-2016, particularly at hospitals in Medicaid expansion states that now number 38 plus Washington, DC. Fitch cites Kaiser Family Foundation data that the number of non-elderly uninsured dropped to 26.7 million in 2016 from 44.4 million in 2013 following the enactment of the ACA in 2010 and implementation of key provisions in 2014. The number rose to 28.9 million in 2019 after the individual mandate was scrapped.

Fitch also views the decision as a potential deterrent to future GOP-backed challenges saying it may “signal growing reluctance to invalidate a law that has become an important aspect of the US healthcare system by providing coverage to millions of Americans under Medicaid or private insurance.” It’s the third time the nation’s high court has upheld the ACA.

In other healthcare sector news last week, two major Michigan-based systems unveiled talks to merge. Southfield-based Beaumont Health and Grand Rapids-based Spectrum Health signed a letter of intent to explore a merger they hope to complete later this year. Beaumont is the largest Michigan system based on net patient revenues and inpatient admissions.

Terms of the potential merger including the fate of both systems’ bonds was not disclosed although officials did say during a call with reporters that the merger could pave the way for a debt restructuring and improved access to capital. Beaumont carries ratings in the single-A category and has $1.5 of debt. Spectrum carries ratings in the double-A category and has $1.1 billion of debt.

Spectrum’s Chief Executive Officer Tina Freese Decker would lead the merged system with a combined 22 hospitals – 14 from Spectrum and eight from Beaumont -- and $12 billion of revenues. Spectrum also operates an insurance arm known as Priority Health that is part of the deal. Beaumont’s CEO John Fox would leave after a transition period.

Fox came under fire from employees as the system considered a merger last year with Advocate Aurora Health which operates the largest systems in Illinois and Wisconsin, over fears it would strip away too much local control and hurt patient care. The two initially announced their talks last June and then cancelled the potential union October.

The decision followed another failed consolidation with Akron, Ohio-based Summa Health. Beaumont and Summa began talking about a partnership in 2019 but then as the pandemic took hold they cancelled them in May 2020.

Moody’s Investors Service in April affirmed Spectrum’s Aa3 rating and stable outlook. “Spectrum generated positive margins even without CARES Act funding in fiscal 2020, buoyed by stronger results at the health plan, but also because of strong volume recovery and good expense management at its largest hospitals,” Moody’s said.

Moody’s affirmed Beaumont’s rating last December saying it “reflects an expectation of strong margins through year-end fiscal 2020, given solid recovery through the third quarter, expense reductions and federal relief funding that will curtail the impact of the pandemic on fiscal 2020 operating performance.”

Consolidation amid the pandemic remained steady and is expected to pick up with some new trends emerging as the sector recovers from the pandemic and hospitals and systems look to manage costs and target new goals like tele-health. Partnerships with health systems that have an established market presence remains a key driver, as does access to capital. The sector will need to tread cautiously as the Biden Administration is expected to step up anti-trust scrutiny, market participants say.