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Sequester's effects threaten to turn healthcare reform into a crisis Sequester's effects threaten to turn healthcare reform into a crisis
(7 months later)
Hospitals are being whipsawed by Washington.Hospitals are being whipsawed by Washington.
Hospital operators, who expected a financial boost from Obamacare, could get a big slap to their profits from the sequester budget cuts.Hospital operators, who expected a financial boost from Obamacare, could get a big slap to their profits from the sequester budget cuts.
In the endless tussle over budgets and power, Washington seems to have turned healthcare reform into a potential healthcare crisis. Moody's predicts that for-profit hospitals – many of which are owned by companies that trade on the New York Stock Exchange – could suffer a steep cost this year as a result.In the endless tussle over budgets and power, Washington seems to have turned healthcare reform into a potential healthcare crisis. Moody's predicts that for-profit hospitals – many of which are owned by companies that trade on the New York Stock Exchange – could suffer a steep cost this year as a result.
A new report from Moody's on Monday suggests that the sequester's cuts to the Medicare budget could hit for-profit hospitals hard enough to lower the sector's earnings by up to 6% this year. Many of those hospitals depend on Medicare payments for one-third of their budgets, or half in the case of specialty hospitals.A new report from Moody's on Monday suggests that the sequester's cuts to the Medicare budget could hit for-profit hospitals hard enough to lower the sector's earnings by up to 6% this year. Many of those hospitals depend on Medicare payments for one-third of their budgets, or half in the case of specialty hospitals.
The estimates are surprising, because many experts expected hospitals to profit from the Affordable Care Act; the shares of hospital companies climbed in the markets when President Obama was elected, and analysts at JP Morgan advised in December that investors should buy more stock in hospital operators.The estimates are surprising, because many experts expected hospitals to profit from the Affordable Care Act; the shares of hospital companies climbed in the markets when President Obama was elected, and analysts at JP Morgan advised in December that investors should buy more stock in hospital operators.
The sequester calls for a 2% cut to Medicare payments to doctors. That will affect how much hospitals get paid, how many new doctors get trained, and how many patients hospitals can afford to see. In a statement, the National Association of Community Health Centers suggested that 900,000 patients could be turned away from healthcare.The sequester calls for a 2% cut to Medicare payments to doctors. That will affect how much hospitals get paid, how many new doctors get trained, and how many patients hospitals can afford to see. In a statement, the National Association of Community Health Centers suggested that 900,000 patients could be turned away from healthcare.
According to Moody's, any publicly traded healthcare company is likely to suffer, including HealthSouth – which gets 72% of its revenue from Medicare payments – and SelectMedical and Kindred Healthcare, which depend on Medicare for 48% and 41% of their revenues, respectively. HealthSouth's biggest source of revenues are rehabilitation facilities, and many of those patients use Medicare to pay for their treatment. Kindred runs specialty hospitals and skilled nursing facilities.According to Moody's, any publicly traded healthcare company is likely to suffer, including HealthSouth – which gets 72% of its revenue from Medicare payments – and SelectMedical and Kindred Healthcare, which depend on Medicare for 48% and 41% of their revenues, respectively. HealthSouth's biggest source of revenues are rehabilitation facilities, and many of those patients use Medicare to pay for their treatment. Kindred runs specialty hospitals and skilled nursing facilities.
Moody's analyst Dean Diaz predicted that the Medicare reductions will hit HealthSouth's revenues by about $30.6m this year, and Kindred's by $50.7m. He also estimated that hospital operator HCA would suffer a $166m slap to its revenues, while CHS/Community Health Systems would see its revenues drop by $78.6m and Tenet Healthcare would see a $45.9m hit.Moody's analyst Dean Diaz predicted that the Medicare reductions will hit HealthSouth's revenues by about $30.6m this year, and Kindred's by $50.7m. He also estimated that hospital operator HCA would suffer a $166m slap to its revenues, while CHS/Community Health Systems would see its revenues drop by $78.6m and Tenet Healthcare would see a $45.9m hit.
Diaz said his calculations "assume a full-year effect of the cuts, although we do not know how long the government will actually keep the provisions in place".Diaz said his calculations "assume a full-year effect of the cuts, although we do not know how long the government will actually keep the provisions in place".
"Another risk for the for-profit hospitals is that sequestrations broad cuts to government spending will cause an economic slowdown and exacerbate the pressure on hospitals' already slow revenue and profit growth," Diaz wrote."Another risk for the for-profit hospitals is that sequestrations broad cuts to government spending will cause an economic slowdown and exacerbate the pressure on hospitals' already slow revenue and profit growth," Diaz wrote.
He also pointed out that the continuing unemployment crisis may mean that fewer people will have health insurance until the reforms kick in during 2014.He also pointed out that the continuing unemployment crisis may mean that fewer people will have health insurance until the reforms kick in during 2014.
Defense industry hit especially hardDefense industry hit especially hard
The paradox of the sequester is that it was cooked up in Washington, and is likely to hit Washington harder than any other part of the country. The main industry that will take a hit is defense, which is based heavily around the US capital.The paradox of the sequester is that it was cooked up in Washington, and is likely to hit Washington harder than any other part of the country. The main industry that will take a hit is defense, which is based heavily around the US capital.
The area could have 151,000 furloughed Department of Defense employees with $1.12bn in potential pay cuts – which would account for one-third of the gross metro product of Washington, according to Moody's analyst Curt Beaudoin.The area could have 151,000 furloughed Department of Defense employees with $1.12bn in potential pay cuts – which would account for one-third of the gross metro product of Washington, according to Moody's analyst Curt Beaudoin.
Beaudoin noted that defense cuts would be only part of the hit to Washington. "The aggregate effect will reverberate through the local economy in the form of reduced business and consumer confidence, lower loan demand, and higher delinquencies … as the newly unemployed struggle to pay their bills, crimping the results of the banks operating in the area."Beaudoin noted that defense cuts would be only part of the hit to Washington. "The aggregate effect will reverberate through the local economy in the form of reduced business and consumer confidence, lower loan demand, and higher delinquencies … as the newly unemployed struggle to pay their bills, crimping the results of the banks operating in the area."
While big banks including Bank of America will easily take the hit, the drop in deposits could hurt small firms like United Bank, which is a subsidiary of United Bankshares and holds one-third of its $2.19bn of deposits in the Washington area.While big banks including Bank of America will easily take the hit, the drop in deposits could hurt small firms like United Bank, which is a subsidiary of United Bankshares and holds one-third of its $2.19bn of deposits in the Washington area.
The cuts may also hurt small banks in other states where the defense industry is concentrated, including Hawaii, Alaska, New Mexico, Kentucky and Alabama.The cuts may also hurt small banks in other states where the defense industry is concentrated, including Hawaii, Alaska, New Mexico, Kentucky and Alabama.
The defense sector is unlikely to suffer right away because the cost-slashing will take time, according to Moody's analyst Russell Solomon, but in 2014 the picture will be harsher as the Department of Defense distributes the cuts. Solomon predicted that companies that work closely with the Pentagon on operations and maintenance would suffer most. He included among those Engility, Exelis, SRA International, ManTech International, Hunter Defense Technologies and ADS Tactical.The defense sector is unlikely to suffer right away because the cost-slashing will take time, according to Moody's analyst Russell Solomon, but in 2014 the picture will be harsher as the Department of Defense distributes the cuts. Solomon predicted that companies that work closely with the Pentagon on operations and maintenance would suffer most. He included among those Engility, Exelis, SRA International, ManTech International, Hunter Defense Technologies and ADS Tactical.
Solomon said that larger contractors, such as Boeing, Lockheed Martin and Raytheon, would not be as hard hit because their main contracts are in weapons and large machinery. "Given their diversified large weapons programs will take longer to affect, these companies would have more time to adapt to a new environment that we expect to emerge over the next few years," he wrote.Solomon said that larger contractors, such as Boeing, Lockheed Martin and Raytheon, would not be as hard hit because their main contracts are in weapons and large machinery. "Given their diversified large weapons programs will take longer to affect, these companies would have more time to adapt to a new environment that we expect to emerge over the next few years," he wrote.
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