Bad diagnosis: Hospitals at risk in Obamacare court case

Pushing the cost of health care to consumers
Pushing the cost of health care to consumers

For more than a year, hospitals have been enjoying a cash influx from treating newly Obamacare-insured patients.

But those same hospitals are now facing the prospect of losing out on billions of dollars of money from those patients because of a major Supreme Court case due to be argued next Wednesday.

Among those worried about that possible fallout are the nation's largest for-profit and nonprofit hospital operators. The facilities of both those hospital operators are primarily based in states that will be directly affected the high court's decision in the case called King v. Burwell.

Thierry Dosogne | Getty Images

Plaintiffs in that case claim that federal financial aid that helps most Obamacare customers in 37 states served by federally run pay for their insurance is illegal under the Affordable Care Act. Subsidies issued to customers of state-run insurance exchanges aren't at risk in the case.

Read MoreBig Obamacare price hike threat

If the subsidies for people who purchase plans disappear, it's been estimated that more than an 8 million people would end up leaving the individual insurance market in those states by next year because of increased insurance costs.

That, in turn, would mean fewer insured customers for hospitals. While that in itself won't necessarily put hospitals out of business, it could further strain many of their already tight budgets, and the effects could get worse in future years.

The Urban Institute this month estimated that by 2016 there would be $11.1 billion spent on hospital care by 8.2 million people who will remain insured by health plans, either directly or indirectly, as a result of the subsidies being available.

But if the subsidies are ruled illegal, and those people drop their coverage as a result, direct spending on hospital services by those people would drop to just $1.1 billion, with another $3.8 billion worth of services provided without them paying for it, the Urban Institute report said.

Obamacare's 'make-or-break moment'

While some of that "uncompensated care" would later be recouped by the hospitals from federal and state government programs, "some would be a loss to the hospitals," the report said.

The Supreme Court is expected to rule on the case in late June.

Ascension Health, the largest nonprofit and Catholic hospital operator in the U.S., sees the case as "a make-or-break moment for the Affordable Care Act," according to Ascension spokesman Nick Ragone. Ascension operates in 23 states and the District of Columbia; 18 of the states are states.

"We certainly hope that the Supreme Court rules in favor of those critical subsidies," Ragone said.

The existence of the subsidies, which are available to people with low and middle incomes, Ragone said, has "definitely helped us serve the poor and vulnerable, which is our primary concern in our market. It has helped us serve more people with health care, which is our mission."

The subsidies have also helped the bottom lines of Ascension and other hospital operators.

Ascension, in the second quarter ended Dec. 31, saw a 4.5 percent increase in net patient revenue due to a "favorable change in payor mix," meaning that private insurance plans and Medicaid are picking up a bigger share of patient bills, while the rate of self-paying patients has decreased, Ragone said.

At the same time that Obamacare subsidies have boosted private insurance payments to Acension, the federal government has been cutting the reimbursement rates for Medicare payments. Those Medicare cuts would continue even if the Supreme Court gets rid of the subsidies.

"We're feeling pressure from both sides" as a result of the court case, Ragone said.

Read MoreObamacare customers shoppedaround

HCA, the largest for-profit hospital operator in the nation, cited that pressure to its own bottom line in a brief filed with the Supreme Court asking that the subsidies be upheld. Nearly 9 out of every 10 HCA facilities is located in a state.

Using strong language, HCA slammed the plaintiffs' claim that Congress meant to deny subsidies to residents of states that failed to establish their own exchange as an incentive to get them to create such marketplaces on their own.

The plaintiffs' claim hinges on language in the ACA that explicitly authorizes such subsidies to customers of state-established exchanges; the law does not use such language when talking about customers of a federally run exchange. The Obama administration rejects that conclusion, saying Congress intended for the subsidies to be issued for plans and that the law as written does in fact authorize such aid.

Warning of "absurd" effects

The U.S. Supreme Court
Getty Images

HCA argues in its brief the plaintiffs' interpretation of the law "would disrupt critical aspects of the statutory structure and thwart fundamental purposes of the ACA."

"In fact, the consequences of Petitioners' interpretation are so absurd that Congress could not have possibly intended them," HCA said.

The brief noted that, "in negotiations leading up to the ACA, hospitals agreed to accept, and Congress codified in the law, at least $155 billion in cuts to federal reimbursements hospitals would have otherwise received over 10 years" in exchange for the understanding that the revenue loss would be offset by treating newly insured patients.

Since then, in the states where the company operates, "the ACA had already cut revenues to HCA by approximately $600 million between 2010-2014," the company's brief said. But the incremental revenue that the company has received from treating previously uninsured customers, which began only last year, is so far about $250 million.

Read MoreDepression taking a bigger toll on US economy

If those revenue gains don't continue because the Supreme Court rules that the subsidies are illegal, "HCA's losses from the ACA's provider cuts would not be offset as Congress intended," the company's brief said.

HCA's brief also said the subsidies support multiple HCA goals, such as encouraging patients to seek care in "appropriate settings," having patients be more personally responsible for medical care by paying a portion of the bills out of pocket and improving access to care for women.

HCA noted its patients without insurance are about three times more likely to seek care in emergency rooms than are patients. It also said that that "nine out of 10 uninsured HCA patients pay nothing to HCA or its affiliates for the care they receive," while patients with plans on average pay an average of $390 out of pocket per visit.

Threat grows over time

Moody's Investors Service in a report Thursday said its financial outlook on for-profit hospitals was stable. But the report also noted remaining threats to hospitals included "the upcoming decision on ACA subsidies."

Dean Diaz, Moody's senior vice president, said that so far under the ACA, the biggest boon to for-profit hospitals' bottom lines has come from having people newly insured by Medicaid in states that have expanded eligibility for enrollees in that jointly run federal-state program for the poor.

While the financial windfall from having patients covered by subsidized Obamacare plans has been much less, "obviously we're expecting that to pick up this year" because enrollment has grown over last year, Diaz said.

And "the benefit grows over time," he said. Texas and Florida, neither of which have expanded Medicaid eligibility, have seen big increases this year in the number of people with subsidized Obamacare insurance, giving hospitals new, paying customers.

The Moody's report notes that the harm from invalidating the subsidies is not just limited to those who receive them. If subsidized customers stop buying insurance because their plans are too expensive, the overall risk pool used to price individual insurance policies will be reduced and that could boost insurance costs, the Moody's report said.

Also, without the subsidies, large numbers of people could become exempt from the Obamacare requirement that they have health insurance because the plans would no longer be affordable. And the Obamacare employer mandate would be harmed because the fine only kicks in if a worker buys subsidized coverage on

"A ruling against the subsidies would call into question the overall effectiveness of the ACA's individual mandate, and potentially the law itself. This could ultimately have more damaging implications on hospitals," Moody's said.