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Providers Brace for Super Committee Health Care Cuts

Wednesday, 16 Nov 2011 | 2:20 PM ET

More than half the patients Fred Ralston sees at his rural family practice in Fayetteville, Tennessee are Medicare recipients.

Dr. Fred Ralston
Photo: Jesse Bergman
Dr. Fred Ralston

Even as officials in Washington are expected to cut more than $300 billion in federal Medicare spending over the next ten years, he remains committed to serving the elderly population in his home town.

"We've made a decision here to continue to see Medicare patients, because we're part of the community, " explains Ralston, a former president of the American College of Physicians, the professional association of internal medicine practitioners.

If the super committee sticks with the automatic 2 percent reduction in Medicare costs that would be triggered by a failure to reach a new plan, Ralston feels he and his colleagues will be able to adjust.

"The 2 percent wouldn't take effect for a year," explains Ralston. "I feel like we could make modifications to our normal business activities and we can work harder and more efficiently."

He says the more pressing problem for family practices like his is if the super committee and Congress fail to act on the so-called doctor fix, which would stop the scheduled 27 percent reduction in physician reimbursement set to begin in January 2012.

"That would really make it unsustainable to provide care, " Ralston worried.

Miller Tabak health care portfolio manager Les Funtleyder thinks Congress will pass another doctor fix this year. He also believes the super committee is not likely to enact health care cuts beyond the 2 percent so-called sequestration trigger negotiated in last summer's debt ceiling legislation.

"Everybody you talk to is being very quiet about how this is going to go, " he said. "I'm too much of a cynic to believe we'll get a grand bargain."

Still, Funtleyder says spending cuts under sequestration will hit doctors and hospitals, those providers who treat elderly patients the hardest.

Medicare Cuts Mean Pain For Hospitals

Lincoln County Hospital in Fayetteville, like many small non-profit hospitals, is very dependent on federal health programs, with nearly 40 percent of its annual revenues from Medicare and 20 percent from Medicaid. Almost 70 percent of its patients receive government health care benefits.

Tennessee Hospital Association spokesman Craig Becker says deep cuts in federal health care funding will pose a major challenge for the state's small rural hospitals like Lincoln to keep their doors open.

Photo: Jesse Bergman

"If you're looking at a 20 percent to 30 percent cut in combined Medicare and Medicaid funding, there's no way some of them can take that," said Craig Becker, spokesman for the Tennessee Hospitals Authority.

Nationally, larger, for-profit hospital systems are also expecting Medicare cuts to have an impact on profits starting in 2013.

In September, Tenet Healthcare calculated that sequestration would result in a $40 to $54 million impact to its EBITDA or cash flow annually.

Susquehanna Financial Group analyst A.J. Rice estimates, sequestration would reduce fiscal 2013 EBITDA or cash flow at United Health Systems by $36.6 million which would result in a 23 cent pre share reduction in earnings.

"In many ways, I think most healthcare investors would view sequestration as a positive outcome, relative to other scenarios that have been contemplated," Rice said, because it gives companies and investors greater certainty to calculate the impact.

Insurers Won't See Major Impact

For health insurers, Medicare is an increasingly important business, but Citi Managed Care analyst Carl McDonald believes sequestration will not impact the group's profits.

"An automatic 2 percent reduction in Medicare reimbursement if the super committee is unsuccessful isn't that meaningful for Medicare Advantage plans," he wrote in a note to clients. "They will pass more of that cut automatically onto providers."

From a stock perspective, McDonald believes sequestration will be a positive near term for the sector, because it would mean future Medicare cuts will likely be pushed out beyond the 2012 elections, providing greater visibility for the next year.

More Uncertainty For Munis

While an automatic 2 percent cut in Medicare spending could provide more clarity for equity investors, for municipal bond investors, automatic cuts in Medicaid spending could make the outlook more difficult.

"Every state to some degree relies on Medicaid funding, " said Peter Hayes, municipal bond portfolio manager at BlackRock . "It's not a matter of if it will have an impact. It's a matter of how significant an impact it is."

States Most Reliant On Medicaid

State State Medicaid as a % of General Fund Revenue
Ohio OH 36%
New Hampshire NH 31%
Massachusetts MA 28%
Rhode Island RI 26%
Pennsylvania PA 24%
Michigan MI 23%
South Dakota SD 23%
Tennessee TN 22%
Connecticut CT 21%
Illinois IL 20%
Source: Urban Institute, Kaiser Cmmsn, Blackrock

Spending on Medicaid, the federal program of health coverage for low-income residents, is split between the states and the federal government.

States like Ohio could face deep budget shortfalls, and could see their credit rating put at risk, says Hayes. Federal funding for Medicaid accounted for 36 percent of the state's general funds in 2010. A two-percent sequestration cut in Medicaid would be compounded by the end of stimulus funding for the program, which helped many states meet higher demand for services between 2007 and 2011.

"The rating agencies will probably begin to revise their outlooks," Hayes said, which will put even more pressure on states by boosting debt costs. "In many cases, one notch downgrades."

Waiting and Watching

In Fayetteville, Fred Ralston is bracing for the worst but hoping for the best from the super committee. "My feeling is that long term for my practice and the country, we really need to get a handle on how to make health care more efficient."

He worries that a one-size fits all deficit reduction strategy is too blunt an instrument for doing that.

"When we look at how efficient primary care is and how much it helps us in overall savings, we're moving in the wrong direction," said Dr. Ralston.

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