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As the U.S. Supreme Court weighs the constitutionality of the Affordable Care Act, what does the future hold for health care creditors and those in health care collections?

Last week the court heard three days of testimony on the constitutionality of one of the keystones of the 2010 Affordable Care Act, the requirement that an estimated 32 million uninsured Americans must purchase health insurance beginning next year or face a penalty. The court is expected to deliver a decision in June.

For health care creditors such as hospitals and other medical service providers, profitability depends upon reducing bad debt, the majority of which comes from patients who fail to pay their bills. If the highest court in the United States decides against the individual mandate, health care creditors and health care collections will see maintenance of the status quo with regard to patient no-pays. If the court instead sides with Congress and the president, millions of Americans will be required to have health insurance, reducing health care debt and a commensurate drop in health care collections.

No one knows what the nine justices will decide, but Wall Street, for one, has begun to hedge its bets on health care-related bonds, Heather Perlberg and Sridhar Natarajan of Bloomberg reported last week. If the Supreme Court strikes down the individual mandate provision, investors perceive that healthcare organizations will become less profitable, and are therefore taking steps to protect their investments against losses through financial instruments known as credit-default swaps.

Medicare Cuts

Regardless of what the Supreme Court decides, health care creditor bad debt will not be going away any time soon. As millions of aging Baby Boomers become eligible for Medicare, the federal government has responded by cutting reimbursements to health care providers.

As Bryan Rye in Business Week points out, several provisions of the Affordable Care Act that are not under review by the Supreme Court will directly affect the bottom line of health care creditors.

The Act cuts Medicare reimbursements to hospitals by $155 billion through 2020, which represents a 2 percent reduction, which many perceive as manageable. Rye points out that when combined with the Medicare cuts from the Middle Class Tax Relief and Job Creation Act of 2012 that was signed in February, hospitals will endure a double-whammy that will go directly into bad debt.

The Middle Class Relief Act contains several provisions related to Medicare reimbursements. One of the provisions is postponement of cuts to Medicare reimbursement to the tune of 27 percent. To fund that, the Congress and President eliminated government reimbursements for patients who fail to pay their medical bills, transforming those into bad debt.

Today Medicare reimburses health care providers anywhere between 70 and 100 percent of bad debt from eligible patients who fail to pay their deductible or co-pay bills. That percentage will now be cut to 65 percent across the board, although for those health care providers who currently receive reimbursements on 100 percent of bad debt, the new law will reduce that percentage to 65 percent over the next three years.

The biggest loser in the Affordable Care Act, according to Rye, are home health care providers, who will have Medicare reimbursements cut by $40 billion over the next 10 years. “What’s more, Congress is also considering whether to add a co-payment requirement for patients, opening up providers to increased bad-debt expenses,” Rye writes.