Dive Brief:
The CMS is expected to soon approve several enhancements to state-directed payment programs for Medicaid services, which could result in positive earnings before interest, taxes, depreciation and amortization revisions for HCA Healthcare and Universal Health Services, according to analyst notes from TD Cowen.
SDP enhancements are likely to be approved this year in Tennessee, Texas and the District of Columbia, and increases could come in Florida and California before the end of 2025, according to the analysts.
Higher Medicaid reimbursements could drive up HCA’s EBIDTA consensus estimate by nearly 10% over the next year, while UHS’ consensus estimate could rise as much as 20%.
Dive Insight:
Investors have recently taken a closer look at how state supplemental payment programs could boost health systems’ bottom lines, following the issuance of a new rule that paves the way for hospitals to receive additional funds for caring for Medicaid patients.
In April, the Biden administration finalized a rule that allowed states to cap state-directed payments for Medicaid services at the average commercial rate. The limit is the maximum amount states can pay providers for Medicaid services while receiving matching funds from the federal government.
It’s the first time the CMS has formally weighed in on payment limits. Previously, payment rates varied across the country.
The rule is expected to increase Medicaid payments to hospitals because commercial rates are typically higher than rates paid by public plans.
The change came after extensive lobbying from the American Hospital Association. The AHA argued providers have been routinely underpaid for performing Medicaid services — even with supplemental payments.
Historically, Medicaid has provided the lowest reimbursement levels of any payer class and has been largely unprofitable for providers, leading executives to opine the challenges of offering care. During a recent earnings call, HCA’s CFO Mike Marks labeled Medicaid the system’s “most challenging payer.”
Analysts from TD Cowen said the impact of the funds is currently “underappreciated,” and will have durable and large-scale effects on for-profit health systems.
Some of the nation’s largest for-profit health systems have already received a boost from enhanced SDP payments this year. During the second quarter, executives from Tenet Healthcare, HCA and UHS reported supplemental revenues from the payments ranging from $30 million and $125 million.
“Few investors anticipate that these supplemental Medicaid payments could increase further – and we conclude they will still grow materially,” the analysts said. “We expect the growth rate of SDP to further accelerate because many states have not yet maximized their programs, and the 2024 Medicaid final rule gives regulatory carte blanche to do so.”
With the new maximums, the CMS said it expects total SDP spending to rise from $78 billion in 2023 to $99 billion by 2029. Hospitals specifically could glean an additional $16 billion to $36 billion by 2028 from enhanced payments, according to the Commonwealth Fund.
The impact of SDPs could be greater in the near-term than returns to normal healthcare utilization and cost trends, according to the analysts.
UHS and HCA’s EBITDA revisions could rise even higher in the long-term “if all states were to increase SDP programs to the average commercial rate.”
Currently, only nine states — Texas, Nevada, South Carolina, North Carolina, Utah, Oklahoma, Kentucky, New Jersey and Iowa — have set SDP reimbursement levels at 90% of the average commercial rate or higher, according to the analyst note.
