OBBBA Medicaid cuts increase credit risk for NFP hospitals

Looming healthcare cuts as legislated in the One Big Beautiful Bill Act (OBBBA) constitute the biggest risk to the not-for-profit (NFP) hospital industry, according to insights from experts with the leading credit-rating agencies.

The OBBBA is set to hit Medicaid over the next few years, bringing potentially sizable reductions to enrollment along with direct cuts to provider revenue. In addition, hospitals are dealing with a big rollback in Affordable Care Act marketplace insurance enrollment.

“We’ve got this little window of time to make some adjustments — expand if you need to expand, contract if you need to contract — but do those things to harden and rock-proof your organization for what we know is going to be, unless something changes, an excessively tough period going forward,” said Kevin Holloran, senior director and sector leader of the Not-for-Profit Healthcare Group with Fitch Ratings.

A panel discussion last month at the Not-for-Profit Healthcare Investor Conference, hosted by HFMA, Barclays and the American Hospital Association, featured Holloran; Suzie Desai, director of not-for-profit healthcare with S&P Global Ratings; and Dan Steingart, associate managing director for U.S. Public Finance with Moody’s Ratings.

While topics such as AI, Medicare Advantage and the affordability of healthcare also featured prominently in the session, the upcoming OBBBA cuts were top of mind.

Rating agencies want quantified exposure and mitigation plans

Direct revenue impacts in Medicaid will stem from OBBBA reductions starting in FY28 to provider tax contributions and state-directed payments (SDPs)

In their conversations with health systems, the ratings agencies hope to hear insight about the prospective repercussions, Desai said.

“It’s helpful to get what that looks like over a five-year, six-year period,” she said, noting that restrictions on provider taxes might not have an evident impact until 2029 or later.

Said Holloran, “What’s your hit, what’s your exposure? It’s $10 million, it’s $100 million, it’s a billion dollars. Give me a number, and then give me those mitigants that you’ve got to work for it. What can you do, when and how? What’s the timing, and do they line up?”

He added, “We’re getting very good answers, very good support.”

Health systems are providing insight about the operational upgrades they can use to ease the financial burden imposed by the OBBBA.

“And then it is also the strategies, because it’s not going to just be done with operating improvements,” Desai said. “It is going to be about re-shifting potentially how the organization is doing something, whether it’s partnerships, whether it’s service line rationalization.”

The three agencies all are maintaining neutral or stable outlooks for the NFP hospital sector, even amid the apparent challenges.

“If it doesn’t get there, where are you going to make the shifts?” Desai said.

Regulatory uncertainty limits near-term rating actions

The rating agencies understand that organizational projections are educated guesses at this point, given the uncertainty on the regulatory front. For example, CMS only recently put out final rules regarding SDPs and the Medicaid work requirement, both of which were considered noteworthy for going beyond the statutory language in the OBBBA.

Estimates can be converted to formalized outlooks (e.g., positive, negative, stable) for organizations as concrete information becomes available on the implementation of specific provisions.

“As that gets more defined and more certain, we have more visibility on that [and] that becomes more of the conversation,” Desai said. “And then it’s like, OK, wait, you have negative margins right now, and next year you’re expecting another $100 million cut.”

It remains too early to say how the OBBBA will factor into an organization’s outlook.

“We look out 12 to 18 months for our outlooks, so to the extent, for example, that meaningful cuts are happening 36 months from now, it really wouldn’t be appropriate,” Steingart said.

The three agencies all are maintaining neutral or stable outlooks for the NFP hospital sector even amid the prospective challenges.

“Margins are OK, balance sheets are fine, and the majority of the [Medicaid] hit is in the last five years,” Holloran said, referring to the second half of the decade-long period after the law’s enactment.

Political uncertainty should not delay mitigation planning

Hospitals should not expect OBBBA provisions to get rolled back based on a possible shift in the political climate after the midterm elections.

“The reality is, this is what we’ve got,” Holloran said. “This is what we have to work with now. You can’t just hope it’s going to go away. You’ve got to plan for it, execute on it.”

He added, “That’s what we’re really looking for, is that plan. How do you limit the damage of it? Because, by the way, none of it is good. Some people are [in] less bad [situations], but we’re all going to take a hit here, [with] a lot of money coming out of the system writ large.”

Even so, the adverse impact might not dramatically show up in ratings because rated hospitals tend to have the resources they’ll need to endure the cutbacks.

“Our rated group of credits will survive,” Holloran said. “They’ll be OK, they’ll figure it out. But there are a whole lot of people out there that will not have the wherewithal to get through this, quite frankly. So, healthcare in general is going to suffer.”