The costly health care reform bill recently signed into law will have intended and unintended consequences for entities throughout the sector. While some provisions of the law begin shortly, many will not start for several years, including mandatory insurance in 2014. In addition, implementation will require further actions. For the municipal bond market, the results may be both positive and negative.
On the market side, with new taxes imposed to pay for the program, one outcome is likely to be increased demand for tax-exempt municipal bonds and lower bond yields. The Congressional Budget Office scores the law as providing over $100 billion in savings over the first 10 years and over $1 trillion during the next 10. With the overall cost for healthcare expected to rise, Federal spending will also grow and additional tax rate increases will be likely in the future.
On the credit side, the likely eventual winners and losers are less clear. Experts seem to be coming out on both sides of the argument. Indications are that the increase in the insured population will be a positive for providers, but other changes, such as reduced Medicare reimbursement may more than offset these gains. For example, the outlook for pharmaceuticals is negative according to Moody's Weekly Credit Outlook (3/22/10), but positive according to the Wall Street Journal (WSJ) (3/22/10). The same disagreements exist is over the impact on insurance companies.
New Taxes*- Beginning in 2013: 3.8% tax on investment income for individuals earning more than $200,000 and married couples earning more than $250,000. Municipal bond interest appears to be exempt. The income thresholds are not indexed for inflation. While the tax is a negative overall for investors, the exemption will likely benefit muni bonds.
- Beginning in 2013: 0.9% increase in payroll tax for Medicare, from 1.45% to 2.35% for individuals earning more than $200,000 and married couples earning more than $250,000. Again, the income thresholds are not indexed for inflation. As this provision is based on wages, it should be neutral to the bond market.
- Beginning in 2014: A penalty on individuals who do not purchase healthcare insurance. The penalty in 2014 is $95 or 1% of income (whichever is greater), and is slated to rise to $695 or 2.5% of income by 2016. The income used for the calculation is Modified Adjusted Gross Income (MAGI), which may include municipal bond interest, and it is indexed for inflation.
- Beginning in 2012: Annual fees on drug-makers, allocated by market share, of $2.5 billion. Fees are slated to rise in ensuing years.
- Beginning in 2013: 2.9% excise tax on medical devices, allocated by market share.
- Beginning in 2014: Fines of up to $3,000 per employees for employers with more than 50 employees who do not provide "affordable" healthcare coverage. The first 30 employees are exempted.
- Beginning in 2014: Annual fees of $8 bill on insurance companies, slated to rise in the ensuing years.
- Beginning in 2018: 40% high-value medical plan excise tax on plans with values of more than $10,200 for individuals and $27,500 for families.
A related issue is the expected return of the 39.6% top federal marginal tax bracket, which was temporarily repealed in 2001 and then lowered to the current 35.0% in 2002. That reduction expires in 2010. While the President is proposing modifications to all tax brackets, they do not preclude a reversion to the 39.6% top rate. This change may serve to make tax-exempt bonds more attractive starting next year.
Credit Implications: Potential winners and losers
Hospitals: MIXED
Hospitals should benefit from the expected 32 million fewer uninsured patients, leading to improved volumes, and reduced bad debts. However, planned Medicare payment reductions of $155 billion over 10 years, reduced disproportionate share funding beginning in 2014, and future required Medicare efficiency cuts in high-cost markets may prove to be a greater negative offset. In addition, The Wall Street Journal (3/22/10) noted that there is no solution in place for uninsured illegal immigrants, who will not be able to buy insurance on the planned exchanges. Hospitals had been hoping that insuring illegal immigrants would help with unreimbursed expenses for this population. Moody's Weekly Credit Outlook (3/22/10) explains that expansion to Medicare funding should be a positive, especially for hospitals with employed physicians.
The law also provides for additional requirements to be placed on Not-For-Profit 501(c)3 hospitals including an IRS review at least every 3 years regarding the entity's community benefit activities, as well as the entity's need to produce a community needs assessments, and establish written financial assistance policies (Source: CCH Tax Briefing: Health Care Reform Act, 3/21/10). It is not clear what would happen to a hospital that does poorly on the IRS review.
For-profit and Not-for-profit Health Systems: MIXED
Moody's Weekly Credit Outlook, 3/21/10 indicates for-profit health systems have a neutral to modestly positive outlook, but sees a negative outlook for not-for-profits. It forecasts both for-profit and not-for-profit systems will be relatively unaffected over the next three years, as many key reform provisions don't begin until 2014. They predict that after that year, the larger more sophisticated for-profits will be better able to benefit from economies of scale and diversity and encounter fewer labor and pension issues. Moody's anticipates more consolidations of stand-alone hospitals. My view is neutral to mildly positive for larger hospitals and systems, while more negative for stand-alone or smaller systems.
Healthcare sector:
Insurance Companies / HMOs: NEGATIVE
Insurance companies may suffer from increased regulations, control over pricing and requirements to cover additional lives. However, there are possible positive outcomes as noted by S&P Equity Research in a comment in Bloomberg Business Week "Around the Street" article dated 3/22/10. They see the increase in enrollees (up to 20 million) and improved economies of scale as positive. They also note that increased size may allow for better negotiating positions with providers (hospitals and doctors) and opportunities for consolidations. The WSJ (3/22/10) notes an expected negative impact, but it could have been worse since:
- Some of the fees on the industry have been delayed
- There is no public option
- The new federal oversight agency to monitor premiums was not established
My view is more to the negative here as I think rate increases and margins will be scrutinized.
Pharmaceuticals and Medical Device Manufacturers: MIXED
Per Moody's (Weekly Credit Outlook 3/22/10) the bill is mildly negative for pharmaceuticals and medical device manufacturers. They may benefit from increased volume with more insured patients, but this may be offset by new fees. The WSJ (3/22/10) indicates that many feel Drug Makers are the sector that came out best, due to increased insured customers, removal of provisions that would have let the government negotiate directly regarding Medicare Part D pricing.
Doctors: POSITIVE
The financial impact to doctors is likely to be positive. Howerver, the Wall Street Journal (3/22/10) noted that expected patient increases and physician shortages will be a negative, particularly for primary care doctors. In addition, a potential 21% cut in Medicare rates, which has been postponed several times, has not yet been eliminated, as physicians had wanted. They note that the American Medical Association and the American Association of Medical Colleges supported the bill, despite some concerns.
Please contact me with any questions or if Mesirow Financial can be of further assistance.
Peter Bianchini
Managing Director,
Senior Municipal Strategist
+1 925.386.0262
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