Preparing hospitals for debt deal fallout and S&P's death knell

What a difference 17 months make. In the spring of 2010, President Barack Obama ignored his advisors and was able to ram through a landmark healthcare reform bill. Now, a painfully badgered president has just cut a debt deal that will help hobble those very reforms.

Nothing in healthcare is going to be cut immediately. However, the bipartisan "Super Congress" committee will likely recommended cuts to Medicaid and Medicare programs just as the large parts of reform are supposed to take hold in 2014.

"It could lead to deep cuts and irreversible changes to Medicare and Medicaid that shift costs to beneficiaries," said Joe Baker, president of the Medicare Rights Center.

Just last spring, Paul Ryan and the rest of the GOP were on the run with their heartless schemes for reforming Medicare. Had Obama shown the same spine in the debt ceiling negotiations as he had with reform, Ryan and his cronies would have had no reason to break stride. Now, they're circling hungrily back around. States are going to be under enormous fiscal pressure to cover millions of new Medicaid enrollees in 2014. The likelihood is that many of the more conservative states are going to find ways not to enroll them.

Another big casualty is going to be physicians. They've been successful in the past with lobbying for putting off the cuts attached to Medicare's sustained growth rate (SGR) formula. But given the current "snip/slash" mood in Congress, it's going to take superhuman efforts to continue to wrangle extensions of the current payment formulas.

I've been highly critical in this column of the American Medical Association's lobbying tactics regarding SGR, particularly its sounding the alarm over the past decade that doctors were one cut away from never treating another Medicare beneficiary again. In retrospect, swallowing some smaller cuts would have been far more palatable than the alternative they are soon going to face.

Meanwhile, hospital executives could play a role in a bit of long overdue civil disobedience--and help put Standard & Poor's (S&P) rogue ratings arm out of business.

S&P has played one of the largest roles in the current economic condition that the United States will probably spend at least another decade fighting out of. It gave AAA ratings to mortgage-backed securities that were toxic garbage and an A rating to Lehman Brothers just before it imploded. Its current downgrade of U.S. Treasuries helped throw the markets into panic, even though the federal government correctly pointed out a $2 trillion error in its calculations. As a matter of fact, demand for U.S. Treasuries went up after the downgrade. Undaunted, S&P went on to downgrade Fannie Mae and Freddie Mac--which were brought low in large part by S&P's previous lousy ratings guidance.

S&P also continues to give the hospital business a mostly negative outlook, even though it is soon expected to have another 35 million additional paying patients as a result of the Patient Protection and Affordable Care Act (assuming it's ever enacted).

The major bond rating agencies operate on acts of faith. An institution such as a hospital issues a bond, the agencies rate it--and then it sends that institution a bill for its services. Institutions are much less likely to quibble if they get a strong rating, which created an escalating--and eventually disastrous--cycle.

If hospitals and every other bond issuer issued statements questioning the credibility of S&P and stopped paying them, there's little it can do to collect (the debt issuers rarely ask for the ratings; the agencies act unilaterally). S&P could sue, but that won't bring in additional revenue any time soon. And by staking out their position in advance, those institutions would insulate themselves from a credible breach of contract action. Within a few months, S&P's ratings arm would go belly up.

It's a radical move. But this country has been suffering economically for more than three years, with years more of pain on the horizon. No large financial institution has yet to pay for this debacle (I discount Lehman, as the hubris of its CEO caused its demise). S&P is as good a target as any. - Ron