The Supreme Court hearings on the constitutionality of the Affordable Care Act (ACA) in late March heightened uncertainty around the law’s implementation. Their decision, expected in late June, will either further entrench the foundational elements of the ACA or create a political vacuum to be filled by new rounds of debate in Congress and on the campaign trail over alternative means to both constrain health care spending (Medicare costs in particular) and expand access to health insurance (an objective that still receives broad support).
The immediate questions for hospital and health system leaders are clear: How might the Supreme Court’s decision in June impact my organization in the near- and long-term? What would be the impact to long-term hospital and health system financial performance if one or more of the law’s provisions were struck down by the Court?
First of all, passage of the ACA has always been a mixed bag for hospitals and health systems. Coverage expansion should both reduce bad debt and modestly increase demand for health services, but those benefits are partially offset by direct reductions in Medicare reimbursements ($155 billion in savings spread across reductions in payment updates, productivity assessments, and cuts to DSH payments, among others).
Additionally, widespread adoption of new payment models (accountable care organizations, bundled payments, value-based purchasing, etc.) has the potential to fundamentally transform our business. The interplay of these elements has always determined whether the ACA would be, on balance, positive or negative for any given institution.
No matter how the Supreme Court rules on the constitutionality of the ACA, broader market forces will generate a more challenging economic environment for hospital operators across the next decade. This is demonstrated in the Health Care Advisory Board's “Pleasantville Hospital” financial model, which applies the impact of four emerging market forces to a typical U.S. hospital’s long-term margin prospects.
Hospitals that continue further on the “business as usual” path face a slow trajectory toward future insolvency. This threat underscores the need for providers to achieve a new performance standard through a sustained focus on reducing cost growth, elevating revenue capture, expediting patient throughput, and proactively improving case mix.
Our guidance on shaping the path to future profitability is outlined in the Health Care Advisory Board’s research study, Running on Medicare Margins.
Gauging the Impact of the Ruling at Your Organization
The base-case Pleasantville model assumes implementation of the ACA in full. However, we have also modeled the long-term effects on a typical U.S. hospital from a range of Supreme Court decisions, from partial invalidation (such as striking down the individual mandate) to an outright rejection of the law in its entirety.
The percentage-point changes to Pleasantville's current model are illustrated below. To understand what drives the total impact of each scenario, we examined how the ruling would affect the three drivers mentioned earlier: coverage expansion, reimbursement cuts, and payment transformation.
Analysis of the Supreme Court Decision Scenarios
Four key takeaways
- As the benefits of coverage expansion in the ACA modestly outweigh the reimbursement cuts, the scenario that is likely to benefit hospitals and health systems the most is the upholding of the law in its current form.
- Counterintuitively, the least negative of the other scenarios would have the Court invalidate the entire law: although the benefits of coverage evaporate, so do the cuts to Medicare; here we assume that Medicare spending continues to grow at its historical rate.
- In the near-term, the worst scenario for hospital finances would throw out coverage expansion (the individual mandate and/or the Medicaid expansion) while retaining the payment cuts.
- The final scenario illustrates the logical conclusion facing Congress should the ACA fail in its entirety. Without the savings generated by cuts to Medicare reimbursement and attributed to payment transformation, the long-term solvency of both Medicare and the United States look dire without even greater cuts to reimbursement. For this scenario, we have modeled out the long-term effect should Congress reinstate the ACA's savings (as projected by the Congressional Budget Office) with future cuts to Medicare reimbursement alone.
Health Care Advisory Board Support
To help our members gauge the impact of these long-term economic forces on your own operating margins, the Health Care Advisory Board has developed the Total Margin Scenario Planner as part of the Medicare Breakeven Project’s Margin Improvement Intensive—and we have updated it to enable members to evaluate the impact of various Supreme Court scenarios on their long-term margin prospects.