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The Affordable Care Act Lowered Interest Rates on Hospital Debt, But Risks Remain

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Dermot Murphy
November 30, 2019

The healthcare sector is a major part of the United States economy. The Congressional Budget Office reports that the United States spent about $3.5 trillion on health expenditures in 2017, representing 18% of GDP. Approximately $1.5 trillion of these expenditures were financed through the federal government, largely due to Medicaid subsidies for low-income households and Medicare subsidies for the elderly.

A significant portion of health expenditures pass through non-profit hospitals, which represent about 70% of all hospitals in the United States. Municipal bonds are an important source of tax-exempt financing for non-profit hospital capital investments, with approximately $203 billion in healthcare municipal bonds outstanding in 2011 and an additional $33.4 billion issued in 2017 alone.

When the federal government proposed a removal of the tax exemption for healthcare municipal bonds in 2017, the American Hospital Association, which represents 5,000 member hospitals and 270,000 affiliated physicians, lobbied to have this proposal removed from the associated bill, arguing that, “The ability to obtain tax-exempt financing is a key benefit of hospital tax-exemption that works to make access to vital hospital services available in communities large and small across America.”

In a recent paper I wrote with Pengjie Gao from the University of Notre Dame and Chang Lee from the Korea Advanced Institute of Science and Technology, we examined the effect of the Affordable Care Act (ACA) on interest rates for healthcare municipal bonds. These rates largely depend on the credit risk of the underlying hospital. The ACA was a boon to hospitals because it increased the percentage of incoming patients with health insurance and thus decreased the uncompensated care burden for hospitals. However, the ACA also increased hospital cash flow risk due to the possibility that the ACA subsidies would be repealed. According to Newsweek, as of August 2017, there have been at least 70 attempts to, “Repeal, modify or otherwise curb the ACA since its inception as law.” Numerous legal challenges about the constitutionality of the ACA, some of which were filed immediately after the law was passed, also contributed to uncertainty about the long-term survivability of the ACA.

Importantly, in June 2012, the Supreme Court upheld the constitutionality of the ACA in a narrow 5-4 decision, resolving a significant portion of the legal uncertainty surrounding the law. Following the Supreme Court ruling, we found that healthcare interest rates permanently decreased by approximately 38.8 basis points relative to non-healthcare interest rates. The yield change represents $3.0 million in interest savings on the average healthcare issue and $1.74 billion in aggregate interest savings on all healthcare municipal bonds issued from mid-2012 to 2015. As a result, hospitals have more money to invest in patient outcomes, medical equipment and research and development.

An important provision of the ACA was that states were required to expand the Medicaid eligibility threshold to 138% of the federal poverty level. The Supreme Court also ruled in the same case that states were not required to expand this threshold. As a result, only 25 states voted to expand the Medicaid threshold by the time the ACA went into effect in January 2014. We found that the post-ACA decrease in interest rates was 50% larger in the states that elected to expand Medicaid compared with the remaining states. The Medicaid-expansion effect corresponds to additional projected interest savings of $320 million on the health care municipal bonds issued in those states.

Long-term healthcare bonds have greater exposure to ACA repeal risk relative to shorter-term bonds because there is a greater chance that the Executive and Legislative Branches will align in agreement to repeal the ACA subsidies at some point in the future. We found that the post-ACA reduction in healthcare interest rates for debts payable in more than ten years was only 10 basis points, which is significantly smaller than the reduction of 45 basis points for shorter-term debt. Our evidence suggests that repeal risk still remains a significant concern for municipal bond investors in the long run.

Finally, we found that the ACA effect on healthcare interest rates was weaker in rural counties compared to urban counties. On average, annual household incomes are lower in rural areas, and many residents enrolled in low-premium, high-deductible plans after the ACA went into effect. Uncompensated care costs continue to be a larger issue for rural hospitals because many residents in these areas, even if insured, have greater difficulty affording the higher deductibles. Consistent with these observations, we found that the decrease in interest rates for rural hospitals (25.2 basis points) was about 38% larger than that for urban hospitals (42.4 basis points).

Overall, the evidence from our study indicates that the ACA was a credit-positive event for hospitals. As a result, many hospitals can now borrow at cheaper rates to finance healthcare infrastructure. However, the weaker post-ACA effect for long-term healthcare bonds suggests that repeal risk still remains an obstacle to long-run growth in the healthcare sector.


Author: Dermot Murphy, Associate Professor of Finance, University of Illinois at Chicago and Faculty Advisory Board Member, Government Finance Research Center

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