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Bankruptcies, the Affordable Care Act, and What’s Next for the Health Care Industry

After the Affordable Care Act (ACA) was launched in 2013, the health care industry responded with vigor. New medical centers opened, more nurses and orderlies were hired, and hospitals expanded their offerings in expectation of 32 million newly insured patients. The ACA, as Forbes noted, was “radically altering business models that hadn’t changed in decades” – often at a feverish pace.

However, by the following year, 16 health care businesses had filed for bankruptcy. They were followed by a steady wave of Chapter 9 and Chapter 11 filings that continued to hit healthcare in 2015-2016, and it soon became obvious that many providers had overextended themselves financially and expanded too rapidly. Now, with the future of the ACA in doubt, the health care industry, reimbursement companies and insurers are experiencing palpitations.

Health Care Consolidations Post-Obamacare

Even before the ACA, there were signs that some health care providers were overreaching. During the 2007-2008 bubble, the expansion of debt financing meant that medical centers eager to expand took on too much debt too quickly. Over-leveraged providers found themselves in the new agora of the ACA with significantly increased competition. This resulted in a rapid uptick in consolidations, particularly in the middle market, as mid-sized providers tried to keep pace with large, full-service medical centers. 

Another factor quickening the pulse of health centers and hospitals is the payer-led demand to decrease costs, which has resulted in more outpatient services and impacted inpatient reimbursements. Smaller health care centers also struggled to keep on top of their new administrative burdens, such as more stringent audit requirements brought in by the ACA. And increased competition – especially from newly consolidated behemoths – has made it more difficult for smaller providers to negotiate rates with insurance companies. All of this has led to fewer resources with which to stay competitive. 

Many medical centers have gone private in the last few years, in part to avoid having to deal with federal reimbursements. According to a study published in the Journal of the American Medical Association, 237 nonprofit hospitals converted to for-profit between 2002 and 2010. In Texas, for example, the number of for-profit hospitals has jumped by almost 30 from 1999 to 2016; they now account for 39 percent of the state’s 417 facilities, as reported by The Dallas News

Medicare Reimbursements Flatline, Affecting Bankruptcies

Under the ACA, Medicare reimbursements shifted from a decades-old, volume-based payment system to one that is value-based, predicated upon pay for performance metrics. This profound change left many health care servicers struggling to adjust both administratively and financially. As the population of the U.S. continues to age, those payments will get stretched thinner and thinner. 

Compounding the difficulties of switching to a new reimbursement system is the fact that Medicaid and Medicare reimbursements for inpatient care have remained flat for a number of years—and are now even declining. Flat Medicare rates over the last several years have, for example, has been a significant factor in the rise of nursing home bankruptcies. In Connecticut, for example, Medicaid spending on nursing homes declined in 2015 compared to the previous two years, and licensed nursing homes declined by 6.9 percent between 2005-2015. And in Georgia, the Southern Regional Medical Center filed for Chapter 11 bankruptcy protection in July 2015. Southern Regional treated a high volume of poor and uninsured patients. Falling Medicaid payments coupled with lack of reimbursement from insurance companies left the hospital $21 million dollars in the hole.

Unless the Trump administration reverses value-based payments, which could happen with the promised repeal of the ACA, value-based payments are expected to continue to increase in line with stated Medicare goals.

ACA Repeal and Bankruptcy Filings

The fact that the industry has spent the past four years expending significant resources to accommodate the demands of the new systems under the ACA means that any major changes now are likely to cause serious reverberations throughout health care.

One of the bright spots of the enactment of the ACA was a drop in personal bankruptcy filings due to medical debt. With the ACA’s likely repeal under the Trump administration, those numbers could ratchet back up, resulting in more unpaid bills for providers. Increased costs posed by the changing landscape of health information technology and cybersecurity will add additional financial burdens and may require investments that smaller providers will struggle to afford.

With a new administration only a few weeks in, the outlook for the health care industry is anything but clear. For the time being, it is business as usual. Open enrollment in the ACA continued through January 31, and Americans continued to sign up for medical care through the exchanges. But, as chief operating officers learned through the ACA process, adaptability in this rapidly changing marketplace is crucial to keeping a healthy balance.

Filed under: chapter 11, Chapter 9, corporate restructuring, health care, m&a

The contents of this article are intended to convey general information only and not to provide legal advice or opinions.

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