NEW YORK--(BUSINESS WIRE)--The Affordable Care Act (ACA) continues to benefit the U.S. for-profit hospital industry but the favorable impact is tapering, according to Fitch Ratings. The health insurance expansion elements of the ACA -- particularly the expansion of Medicaid eligibility in some states -- significantly reduced the financial burden of providing care for uninsured individuals beginning in 2014.
Since the end of 2013, bad debt expense as a percentage of total net revenues dropped by an average of 270 bps for a group of six acute-care hospital companies rated by Fitch to an average of 9.9% of revenues in the first half of 2015. Comparing the rate of growth in revenue gross and net of bad debt expense shows that a drop in bad debt expense as a percentage of revenue was at least a modest tailwind to reported revenue growth for each of the six companies in both full-year 2014 and the first six months of 2015.
These effects are likely to be durable but the benefit is not necessarily accelerating, which explains why some companies reported an unfavorable patient mix shift in third quarter 2015. Not surprisingly, three of the five companies that have reported results for the third quarter of 2015 saw higher bad debt expense as a percentage of net revenue than the prior-year period. Fitch believes this is evidence that the tailwind to payor mix provided by the ACA is tapering.
Volumes of uninsured patients -- and the corresponding influence on uncompensated care -- are likely to be slightly volatile as they have been historically, with dramatic improvement unlikely until more large states opt to expand Medicaid eligibility. This volatility in levels of uninsured patients is not uncommon in the hospital industry and highlights the importance of sound accounting and reserve methodologies.
The full report "For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices" is available at www.fitchratings.com. The report includes an in-depth discussion of bad debt accounting practices and reserve methodologies as well as a company-specific presentation of historical trends in revenue, bad debt expense, accounts receivables, and the allowance for doubtful accounts.
Additional information is available at www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
For-Profit Hospital Insights (Fitch's Annual Review of Bad Debt Accounting Policies and Practices)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=874916
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