The already battered health-care industry faces another blow as Medicaid changes threaten to add more pressure on an industry still struggling to recover from the coronavirus pandemic.
(Bloomberg) — The already battered health-care industry faces another blow as Medicaid changes threaten to add more pressure on an industry still struggling to recover from the coronavirus pandemic.
The Bloomberg High-Yield Hospital Index is the worst-performing sector of the junk-rated corner of the $4 trillion muni market so far this year. The benchmark, which includes bonds sold by hospitals and retirement communities in addition to nursing and assisted-living facilities, has inched up just 0.5% this year, after a 14% loss in 2022. That’s a drastic under-performance compared to the broader high-yield muni index, which has rallied 3.4% this year.
The hospital and health-care sectors continue to endure negative operating margins on higher cost of goods, labor shortages and strained patient volumes. That pressure is reflected in junk bonds as well as debt higher up on the rating spectrum, with Bank of America Corp. research earlier this month attributing the widening of BBB spreads largely to hospitals. Three rating companies, Moody’s Investors Service, S&P Global Ratings and Fitch Ratings, have negative or equivalent outlooks on the not-for-profit hospital sector.
The temporary suspension of annual eligibility screening of Medicaid recipients ended this month, meaning up to 15 million people may not qualify for the publicly-funded health-insurance program for low-income and disabled Americans. As states start to figure out who will not receive Medicaid, treating uninsured patients could drive down revenues and increase costs, according to Fitch.
“This is one more disruption in a year of a lot of disruptions,” said Gary Sokolow, a director at Fitch. “One more pressure, one more disruptor, one more thing that hospitals have to find the resources to deal with.”
Overall hospital expenses are nearly 18% higher than before the pandemic, according to a recent report for the American Hospital Association. For facilities with fewer privately-insured patients, like rural hospitals, the impact from losing Medicaid patients will be more severe.
Medicaid pays less for their care than private insurance companies, but “seventy cents is better than zero on the dollar,” Sokolow said.
The so-called Medicaid redetermination process underscores what Fitch calls a “renewed credit divide” that separates hospitals with more privately-insured patients from those with more government coverage as well as facilities in the 10 states that haven’t expanded Medicaid. Fitch said in an April 12 report that “revenue erosion could be particularly acute for hospitals with higher Medicaid patient levels and could affect credit quality over time.”
Moody’s issued its own warning on April 19, saying more pressure on margins and declining cash may elevate the risk of debt covenant violations by health-care providers contending with “with harsher economic realities.”
“The Medicaid redeterminations, while they haven’t quite started, could add to financial stress,” said Clare Pickering, a director for muni research at Barclays. “That’s definitely a vulnerability.”
She said that changes in Medicaid enrollment may appear as more uninsured patients seek care, increasing hospital costs.
“It is something to be concerned about over time,” she said. Pickering doesn’t expect to see a turnaround in the high-yield hospital sector for several more quarters.
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