There will be no significant direct impact on the not-for-profit health care sector from the downgrade of the long-term sovereign rating on the United States, according to Standard & Poor’s (S&P). However, the rating company expressed growing concern about the American government’s long-term ability to reimburse health care providers.

The government’s ability to fulfill future reimbursements is a rising risk for health systems and hospitals, S&P added.

A considerable number of S&P rated health care providers get over half of their annual income from Medicare and Medicaid. Medicare is federally funded, while Medicaid is funded by both the federal and local governments.

On its website, S&P wrote:

“Our view of the fiscal stress that has contributed to the lowered rating on the U.S. and a few U.S. states, along with reimbursement cuts already planned as part of the recently passed Patient Protection and Affordable Care Act (PPACA), plays a large role in our assessment of growing reimbursement risk.”

Even though a significant proportion of hospital incomes come from government programs, S&P says it does not see the credit rating of the governments that fund those incomes, including state general obligation bond ratings or the American sovereign rating, as factors which limit hospital ratings.

S&P added on its website:

“However, pursuant to our criteria, we consider the fiscal condition and fiscal policies of governments providing reimbursement to hospitals as part of our ratings analysis. Our view of the relatively high level of reimbursement and regulatory risk in the health care sector is a component of what we see as the sector’s industry risk. As a result of our view of industry risk, we have not assigned any unenhanced ‘AAA’ ratings in the sector to date.”

Among 560 not-for-profit acute care credits, S&P only has five AA+ ratings at this moment.

Hospitals receive incomes from Medicaid and Medicare for patient services. The fees are set by Medicaid and Medicare, they are not negotiated. S&P, when rating a hospital, assesses the adequacy of the reimbursement as well as the hospital’s cost structure.

S&P believes health systems and hospitals have performed well recently in controlling and managing costs, despite industry-wide challenges.

S&P wrote:

“Management teams’ diligence in managing costs and limiting capital expenditures, as well as reduced new debt issuance and a rebound in investment markets from 2009’s low, have, in our view, all contributed to stable credit quality in the U.S. not-for-profit health care sector.”

S&P believes the passage of the Patient Protection and Affordable Care Act (PPACA) raised the long-term risk regarding the future adequacy of health care reimbursement. However, until federal fiscal year 2014, it sees the risk as minimal.

Nevertheless, S&P believes that the way the US debt limit was raised, as well as the general fiscal condition of the USA, which contributed to the recent downgrade, point to potential future reimbursement risks beyond what was already in the Patient Protection and Affordable Care Act.

Future credit rating on not-for-profit health care may depend on how S&P assess the depth of future reimbursement cuts to providers, and how hospitals adapt to those cuts.

S&P believes that a considerable number of not-for-profit health systems and hospitals are in a good position to weather lower reimbursements, should they take place, without losing their strong credit profiles.

S&P also added:

“However, we believe that those with already-thin operating margins, inflexible cost structures, and high dependence on governmental payors are more likely to experience credit stress over the next few years.”

Written by Christian Nordqvist