The health insurance expansion elements of the Affordable Care Act (ACA), particularly Medicaid expansion provisions, have significantly reduced the financial burden of providing care for uninsured individuals beginning in 2014, according to Fitch Ratings. Since the end of 2013, bad debt expense as a percentage of revenues has dropped by an average of 166 bps for six for-profit hospitals (FPH). This has benefitted revenue growth and earnings in the hospital sector.
Recent stronger results reflect an improved payor mix that is largely attributable to the expansion of state Medicaid programs but has also benefited from a rising employment rate that has led to more employer-based coverage. Each of the six FPH's has reported a decline in the percentage of self-pay patients treated, which historically have accounted for the lion's share of hospitals' uncollectible accounts. While this effect is not limited to the 27 states that have so far opted into Medicaid expansion, it is much more pronounced in the expansion states.
The underlying trend in bad debt expense was a modest tailwind to net revenue growth for the six for-profit hospital companies followed by Fitch in the first nine months of 2014. This positive trend represents a reversal from results observed during the prior few years, when bad debt expense acted as a headwind to growth in net revenue in the for-profit hospital sector. During this period, uncompensated care levels remained stubbornly high, despite a recovering U.S. economy.
The full report "For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices," dated January 2015, is available at www.fitchratings.com. The report includes an in-depth discussion of bad debt accounting practices and reserve methodologies plus a company-specific presentation of historical trends in revenue, bad debt expense, accounts receivables, and the allowance for doubtful accounts.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research: For-Profit Hospital Insights (Fitch￢ﾀﾙs Annual Review of Bad Debt Accounting Policies and Practices)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=845870
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