GFRC’s Dermot Murphy Releases New Study On The Effect Of ACA On Healthcare Bonds
The Patient Protection and Affordable Care Act, also known as the ACA, was signed into law in 2010 with the purpose of providing all U.S. citizens with access to health care insurance coverage at an affordable cost.
Since going into effect in 2014, the ACA has decreased America’s uninsured population by an estimated 40%. As a result, hospitals have seen significant improvements in profitability and lower rates of unpaid bills by uninsured patients.
According to a new study, “Good for your Fiscal Health? The effect of the Affordable Care Act on Healthcare Borrowing Costs,” from the Government Finance Research Center at the University of Illinois at Chicago, hospitals also have benefited from reduced borrowing costs on municipal bonds because of the ACA.
In particular, interest rates on health care municipal bonds relative to a control group of non-health care municipal bonds decreased by 39 basis points due to the ACA.
The decrease corresponds to interest savings of $3 million on the average health care municipal bond issue. Countrywide, the decrease corresponds to total interest savings of $1.74 billion for all health care 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.
However, the decrease in interest rates only occurred after the Supreme Court ruled in June 2012 that the ACA was constitutional, thereby providing municipal bond investors with increased confidence that the ACA-associated financial benefits to hospitals would persist in the future.
“Hospitals clearly benefited from the ACA-associated decrease in the uninsured rate, but investors weren’t exactly sure how long these benefits would really last,” said Dermot Murphy, study co-author and UIC associate professor of finance in the College of Business Administration. “For all they knew, the ACA might be repealed next month. After the Supreme Court ruling in 2012, however, investors got a shot of confidence that the ACA was more likely to remain the law of the land.”
An important provision of the ACA is that states are 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.
The researchers 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.
The researchers also found that the ACA effect on interest rates is weaker for health care municipal bonds that mature in 10 years or more. These final results suggest that investors are still uncertain about whether the ACA will survive repeal efforts in the long-run through political channels.
“Political uncertainty surrounding the ACA still remains a concern for municipal bond investors in the long run, even if legal uncertainty was significantly reduced following the Supreme Court ruling,” Murphy said.
The study suggests that a positive resolution of the political uncertainty surrounding the ACA’s future should promote higher long-term growth in the health care sector.
Pengjie Gao, professor of finance at the University of Notre Dame, and Chang Lee, assistant professor of finance at the Korea Advanced Institute of Science and Technology, also are co-authors on the study. The study was supported by a research grant from UIC’s Government Finance Research Center.