Medicaid spending reductions proposed by Senate Republicans in their just-released healthcare reform bill will put further financial pressure on providers, potentially forcing safety net hospitals to trim capital investment—including IT spending—as well as their operating budgets and staffing levels, perhaps even resulting in closings for some.

The 142-page discussion draft for the GOP’s Better Care Reconciliation Bill calls for a major pullback on the Affordable Care Act’s Medicaid expansion, with even deeper cuts in the program than the House version passed last month. The Senate bill phases out the ACA’s expansion of Medicaid over three years starting in 2021, rather than in 2020 under the House bill.

However, starting in 2025, the bill institutes tougher funding caps for the federal contribution to Medicaid based on the Consumer Price Index, which has grown slower than medical price inflation. As a result, states will be forced to cut Medicaid payments to hospitals and physicians. But, slashing Medicaid poses significant financial risks for healthcare organizations—particularly hospitals, community health centers and long-term nursing facilities—that have come to rely on Medicaid payments in the seven years since the ACA was signed into law.

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Also See: Senate GOP health plan aims to slash Medicaid spending

Just how big a hit Medicaid spending will take under the Senate bill remains to be seen—a Congressional Budget Office score is expected this week. However, if the CBO scoring of the American Health Care Act, passed last month by the House, is any indication—a decrease of $834 billion over 10 years—the cuts will be significant.

Indeed, Rosemarie Day, president of consultancy Day Health Strategies, contends that major cuts to Medicaid will have a ripple effect across the healthcare system. “It’s going to be a shock to the system potentially,” says Day. “Organizations need to do what they can right now while the money is still there in terms of making investments.”

Cuts to Medicaid are likely to have the biggest financial impact on hospitals—children’s hospitals and rural hospitals in particular. According to Moody’s Investors Service, the median percentage of gross revenue derived from Medicaid is 52 percent for children’s hospitals, versus 14 percent for other hospitals. Other vulnerable provider organizations are hospitals in rural areas, which have large Medicaid populations.

“Hospitals would face considerable growth in uncompensated care, which would stress top-line revenue growth and bottom-line profitability,” according to Fitch Ratings, a ratings firm that assesses financial performance in several industries, including healthcare. “Furthermore, hospital providers in states that expanded Medicaid under the [Affordable Care Act] are at particular risk.”

To cope with these financial pressures, hospitals would be forced to take a number of actions including staff reductions and cuts to clinical services, including emergency medicine, mental health, obstetrics and gynecology, as well as substance abuse counseling for low-income populations, experts say.

“Investment in high Medicaid-spend areas, such as rehab and addiction, would likely feel the pinch,” warns Parie Garg, partner, Health & Life Sciences, at consulting firm Oliver Wyman. “As the cuts come into effect, reimbursement for these hospitals will be substantially impacted—potentially prompting some to close.”

According to America’s Essential Hospitals, its members—nearly 300 of the nation’s largest safety net health systems—operate, on average, with zero profit margins. While health information technology plays a critical role in helping hospitals improve performance and respond to market and regulatory demands for increased efficiency and accountability, these organizations generally must finance HIT costs from operating margins and during financial crunches big-ticket IT projects are the first to be put on hold.

As a result, investment in technology could also be a casualty of deep cuts to Medicaid, making it difficult for safety net hospitals to make large capital expenditures.

Although Garg anticipates that overall IT investment by hospitals—at least for now—will continue as currently planned, these facilities might find making multi-million dollar investments in electronic health record systems are not feasible as the Medicaid cuts kick in over time.

“If hospitals are planning a large-scale reset of their EHRs, they may reconsider if they are anticipating being hit by a large reimbursement cut,” she concludes.

Complicating matters for hospitals is the healthcare industry's ongoing transition to value-based payment models, which necessitate clinicians using EHRs to better track and evaluate patient care. But, shoestring budgets will make it hard for these organizations to invest in the technology they need to succeed.

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