Wednesday, October 22, 2008

Economy puts pressure on state Medicaid programs

The polar ice caps may be melting, but the credit markets have been frozen solid for much of this year. What does the current economic situation bode for health care?

The Nashville health-care community has a special interest in the state economic pressures, namely Medicaid programs.

More than 30 states are facing budgetary shortfalls for fiscal year 2009. The budget gaps range from approximately 20 percent of general fund revenues for California and Florida, to approximately 4 percent for Tennessee.

During economic slowdowns, states have traditionally responded to budgetary pressures by cutting services to beneficiaries and payments to providers.

In fact, during the last economic downturn, all 50 states froze or decreased Medicaid provider payment rates. Financial analysts have been modeling the projected impact and suggest that the payment cuts could range from a low of 2 percent to as much as 10 percent in high-risk states.

States facing severe significant budgetary shortfalls could even cut deeper. Last month, Alabama suspended payments completely when it expended its allotted Medicaid funds.

A recent investment research report attempted to assess the vulnerability of the major hospital companies to Medicaid cuts. Its analysis focused on the five publicly traded hospital management companies, but the results are illustrative.

In the hot seat was Universal Health Services. UHS was considered the most vulnerable to Medicaid cuts because of its high concentration of operations in Las Vegas. Nevada is experiencing a severe economic slowdown and extraordinary state budgetary pressures.

At the other end of the spectrum was Nashville-based Community Health System. The report concluded that Community Health faced the least exposure overall because of its deliberately broad geographic dispersion and moderate Medicaid mix. Brentwood-based LifePoint Hospitals fell in the middle of the pack, with more exposure than Community but less than Universal Health.

Other hospitals keep watch

Medicaid cuts also are of specific interest to Nashville-based Psychiatric Solutions. Psych Solutions is the nation's largest provider of in-patient psychiatric care and receives a significant portion of its revenue from Medicaid programs for children and adolescents.

Health care is generally considered one of the safest harbors in times of recessionary pressures. Reliance on federal programs, such as Medicare, is reasonably safe in tough economic times. State health programs, such as Medicaid, are more vulnerable because of state mandates for balanced budgets.

Companies that are more dependent on Medicaid revenue will take a special interest in this subject.

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