Healthcare reform’s impact on Community Health Systems

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Nov. 18 2014, Published 4:20 p.m. ET

Healthcare reform legislation

The Patient Protection and Affordable Care Act (or ACA) and Health Care and Education Affordability Reconciliation Act are together called “Reform Legislation.”

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Reform legislation and hospital revenues

The Reform Legislation entails both positive and negative drivers for Community Health Systems’ (CYH) revenues. This legislation aims at expanding health insurance coverage through a combination of public program expansion such as state Medicaid expansion and private sector health insurance reforms. Analysts expect the increase in the number of insured people to increase the reimbursements from previously uninsured people by decreasing uncollectible receivables or bad debt expenses.

At the same time, increasing enrollment in government and commercially managed care programs can directly affect operating revenues. With the government restricting reimbursements paid to Medicare managed care and the payers actively negotiating for larger price discounts, Community Health Systems hospitals will earn less revenue per patient. Changes in hospital reimbursement models such as paying in total for an episode of care rather than for individual services and penalties for readmissions should also negatively affect revenues.

Uncompensated care includes underpayments from government programs, charity care, and bad debt expenses. Community Health Systems has increased the provisions for doubtful accounts or uncompensated care by about 21% from $1.72 billion in 2011 to $2.08 billion in 2013. Community Health Systems has greater exposure to non-urban communities, which have a higher proportion of uninsured people.

The company’s major markets—Texas, Indiana, and Pennsylvania—have opted out of Medicaid expansion programs. In this context, Community Heath Systems is second only to LifePoint Hospitals (LPNT), which has the highest provisions for uncompensated care as a percentage of total revenues. HCA Holdings (HCA) is next in order, followed by Universal Health Services (UHS) and finally Tenet Healthcare. You can reduce your exposure to these dubious accounts by investing in the Healthcare Select Sector SPDR ETF (XLV).

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