The Patient Protection and Affordable Care Act, or ACA, remains, as Speaker of the House Paul Ryan observed, the law of the land.

The Patient Protection and Affordable Care Act, or ACA, remains, as Speaker of the House Paul Ryan observed, the law of the land. The failure of Congressional Republicans to fulfill their campaign promises of repealing and replacing this legislation has stabilized the near-term prospects for investors in hospital debt, as well as for the 24 million Americans who were at risk of losing their health insurance.1 State budgets have also dodged a bullet, for now.
Hospitals have also benefited from this legislative deferral with insurance gains from Medicaid expansion, and as the public health insurance exchanges under the ACA have led to higher patient volumes and revenues. These better payor mixes have helped lower bad debt and charity care expenses, translating to improved operating margins.
For state budgets, Medicaid has become one of the largest expenditure items, accounting for almost 20% of spending from state general funds.2 The threat to the Medicaid system under the proposed changes would have imposed on the expansion states unpleasant choices such as cutting eligibility, cutting benefits, lowering medical reimbursement, or finding new sources of revenue to replace federal cuts. The continuation of the current Medicaid program relieves the immediate financial and programmatic threats to these states.
However, it would be a mistake to think that the Trump administration doesn’t have at its disposal the ability to undermine the ACA as it exists now. (See the box below for a brief summary of possible tactics in the next battle of what is looking like a long-term war.) In the interim, bondholders can expect considerable uncertainty around healthcare. To help protect investors from the fallout from any dramatic changes to the ACA, we have concentrated our healthcare bond exposure in hospital systems with dominant market share, strong financial resources and, most important, good payor mixes, meaning lower concentrations of newly covered Medicaid recipients.
Near term, the Administration and Congress are most likely to focus legislative efforts on other areas, particularly tax reform.
The Congressional Budget Office estimated that the Republican’s health care reforms would have reduced the federal deficit by $337 billion by 20263, largely by lowering spending for Medicaid and ending the ACA’s tax credits. Had it passed, the health bill would have made tax reform easier because it created budgetary offsets to counter cuts to individual and corporate taxes without adding to the deficit.
Individual and corporate tax reform could prove as difficult and divisive as healthcare reforms. Not only are various constituencies protective of their special tax treatment; they are also concerned about how to pay for it.
It is often assumed that a cut in the top individual tax brackets, as proposed by various Republican tax plans, would have a negative impact on demand for tax-exempt municipal bonds. In reality, the relationship between taxable and tax-exempt bond yields, as well as general supply trends, has a much greater impact. Many of the current tax proposals have focused on the investment side, with recommendations of income from capital gains, interest, and dividends taxed at 50% of ordinary income rates. Currently, interest and investment income are taxed at the same rate as income tax. All taxable bonds, including Treasuries, could become more attractive because the interest they produce would be taxed at only 50% of the marginal tax rate, diminishing the appeal of tax-exempt bonds relative to taxable bonds. This reform could prove the more potent risk for municipals, as opposed to lower marginal tax rates or lower corporate tax rates, which could reduce the demand for municipal debt from individuals, still the primary holders of municipal bonds.
We still view the elimination of the tax exemption for municipal bonds as a low risk and think it would be counterproductive to the Administration’s goal of helping to support the financing of infrastructure projects.
We will continue to update our clients on the potential impact on state and local finances and municipal debt from legislative and administrative developments.
Howard Cure is the Director of Municipal Bond Research at Evercore Wealth Management. He can be contacted at

1 Congressional Budget Office Cost Estimate American Health Care Act – March 13, 2017
2 “Medicaid’s Share of State Budgets: The Medicaid and CHIP Payment and Access Commission”
3 Congressional Budget Office Cost Estimate American Health Care Act – March 13, 2017


Repeal and Replace: What Next?


The Secretary of Health and Human Services, or HHS, can waive, defer, grant exemptions from, or delay parts of the law that would place a fiscal burden on state, individuals, or healthcare providers. These include:

  • The individual mandate that was designed to be an inducement for healthy people to obtain insurance through the exchange or face a financial penalty.
  • Hardship exemptions granted under the Obama administration to people who earned below the 138% of the federal poverty limit and lived in states that didn’t expand Medicaid, and those who experienced certain circumstances, including homelessness or domestic violence. Indeed, there is nothing preventing the HHS secretary from granting hardship exemptions to everyone who doesn’t have insurance, rendering the mandate meaningless and further destabilizing the insurance market used in the exchanges.

The Administration could use its authority under the Social Security Act to more fundamentally alter Medicaid’s basic structure by changing its eligibility rules, including:

  • Work requirements for adults,
  • Required premium contributions coupled with termination of eligibility for nonpayment, and
  • Eligibility tied to adherence to certain behaviors, such as diet and exercise plans.

However, the 19 states that have been hesitant to expand their Medicaid program under the ACA for fear of repeal and the associated financial disruptions may now take a fresh look. Many healthcare systems have lobbied these state governments to seek financial relief through this expansion.

If the ACA stays in place – and is not undermined by the Administration – and additional states expand their Medicaid programs, investors can expect further stability in hospital finances and the overall municipal bond healthcare sector. We will continue to concentrate our purchases in hospital systems that dominate their markets with strong payor mixes and ample financial resources.

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