Why a “Medicare for All” Reality Could be a Painful One for NFP Hospitals

Kevin Holloran
Jun 3 · 3 min read

By Kevin Holloran

Healthcare remains as much a divisive issue today as it has been for the last decade, from the launch of the Affordable Care Act (ACA) and its numerous legislative and judicial challenges, to what we are seeing now with some prominent Democratic Presidential hopefuls espousing “Medicare for All”.

Initial talk around “Medicare for All” seemed to indicate it as a far-fetched and unattainable proposal that would be dead on arrival. However, the more traction it gains and the more likely it is to be seriously considered, the increased likelihood that it is a proposal that may have legs to it after all. In fact, we may be closer to “Medicare for All” than initially thought seeing as the Federal Government is already the largest payor of health care.

If it becomes a reality, “Medicare for All”, despite its best intentions, could be a huge negative for acute care hospitals and health systems.

Why?

Almost without exception, 100% of a hospital’s operating profits come from commercial and private insurance. Medicare is a “break-even” payer at best from a profit perspective and for many providers, it is less than this.

Consider a simplified example of a hospital with a payer mix of around 40% Medicare, 20% Medicaid and Self-Pay, and 40% commercial and private. This typically should enable a standard provider to make about a 4% operating margin. This is a very strong operating margin for the industry that allows inpatient providers to reinvest in their facilities and technology. The lower the commercial percentage, the lower the operating margin, as Medicaid and Self-Pay also pay at levels below the cost of providing service.

So, if it is assumed that 100% of patients switch to current Medicare rates, the profit margin would fall to approximately -10%. Since Medicaid reimbursement rates tend to be even lower than Medicare’s, if the Medicaid program is left unchanged and not converted to Medicare rates, then with an overall payor mix of 80% Medicare and 20% Medicaid, profit margins would fall even further to around -13%.

Which begs the question: “Would hospitals and health systems, without special funding, stay in the business of NFP health care long-term under ‘Medicare for All’?”

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This would heavily depend on what choices were made around Medicare funding rates. If rates were not materially increased from current levels, hospital operating margins would become negative essentially overnight. Cash flow would then tighten to bare minimum levels for even the best providers, while falling into the red for many other hospitals and health systems. This means that even without any capital spending in a capital intensive industry, a healthy liquidity cushion would eventually be drained dry, and faster should they needed a capital infusion.

This is not to say that hospitals would balk at “Medicare for All” en masse. Most mission-driven organizations would likely try to make an honest go of it. But as the saying goes, “No margin, no mission”! Despite their best efforts, there’s a very real possibility that, without a significant step-up in the per-patient federal contribution compared to the current Medicare program, many mission-driven organizations could eventually exit the business, take their existing liquidity and find alternative ways to serve the community.

Conclusion

So what would “Medicare for All” look like if it comes to fruition? First off, it is important to remember that the history of healthcare is full of unintended consequences which affect hospitals and patients. Without any significant change to current payment levels, “Medicare for All” would likely result in some hospital closures and, potentially, the rationing of healthcare over time.

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Commentary from Fitch on why we think what we think.

Kevin Holloran

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Why? Forum

Commentary from Fitch on why we think what we think.