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Briefs, Research Reports & White Papers
UIC associate professor of finance Dermot Murphy studies the impact of the Affordable Care Act (ACA) on municipal healthcare borrowing costs. The ACA expanded the insured customer base for hospitals, although exposed them to greater regulatory risk. Following a favorable 2012 ACA Supreme Court ruling, healthcare yields decreased by 39 basis points, for per-issue and economy-wide interest savings of $3.0 million and $1.74 billion. The effect was larger for urban and private hospitals. Yields decreased by another 17 basis points in states that voted to expand Medicaid. However, the ACA effect on long-term yields was weak, suggesting that repeal risk remains an obstacle to long-term financing and growth in the healthcare 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, are also co-authors on the study. The study was supported by a research grant from UIC’s Government Finance Research Center.
Click Here To Read The Abbreviated White Paper
Good for your Fiscal Health? The Effect of the Affordable Care Act on Healthcare
University of Notre Dame
Korea Advanced Institute of Science and Technology
University of Illinois at Chicago
The Patient Protection and Affordable Care Act (ACA) is widely considered to be the most
significant regulatory overhaul of the U.S. healthcare system since the passage of Medicaid and
Medicare in 1965. Signed into law in March 2010, the primary objective of the ACA was to
provide low-income U.S. residents with better access to health insurance through a
combination of federal subsidies for low-income households and an expansion of the income
threshold for Medicaid eligibility at the state level. The ACA subsidies were largely funded by
additional taxes on high-income earners and cuts in Medicare reimbursement rates.
Dermot Murphy, associate professor of finance at the University of Illinois at Chicago, and his coauthors
investigated the net effect of the ACA on healthcare municipal bond borrowing costs.
Municipal bonds are an important source of funding for government and not-for-profit
hospitals, with $203 billion of healthcare municipal bonds outstanding in 2011 and $33.4 billion
issued to finance hospitals in 2017 alone.
The yield spread on municipal bonds relative to U.S. Treasuries is largely determined by
the credit risk of the underlying issuer. The ACA was seen a credit-positive event for hospitals
because it decreased uncompensated care costs and expanded their customer base, resulting in
improved hospital operating margins. On the other hand, the ACA was seen as a credit-negative
event for hospitals because of the accompanying cuts to Medicare reimbursement rates.
Hospitals also became exposed to the risk that key subsidy provisions would be repealed
and the Medicare cuts would remain in place. 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 future of
In June 2012, the Supreme Court upheld the constitutionality of the ACA in a narrow 5-4
decision, resolving some of the legal uncertainty about the future of the ACA. Following the
Supreme Court ruling, the researchers found that healthcare offering yields permanently
decreased by approximately 38.8 basis points relative to non-healthcare offering yields. The
change represented $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. The evidence suggests that the impact of the ACA on healthcare borrowing costs was
economically sizeable, but only after the resolution of legal uncertainty.
The researchers also analyzed how healthcare yields were affected in particular by the
ACA Medicaid expansion provision. In its original form, the ACA mandated that states were
required to either expand the income cutoff for Medicaid eligibility to 138% of the federal
poverty line or lose all Medicaid funding. However, the Supreme Court also ruled in 2012 that
this provision was “unconstitutionally coercive,” thus permitting states to reject the Medicaid
expansion provision without losing their previous levels of federal funding. As a result, 25 states
voted to expand Medicaid before most of the ACA provisions went into effect in January 2014.
The researchers found that the ACA reduced healthcare offering yields by 49.7 basis
points in states that voted to expand Medicaid, which was about 50% larger than the reduction
in healthcare offering yields in non-expansion states. The larger effect in Medicaid-expansion
states corresponded to additional interest savings of $320 million on the healthcare bonds
issued after the state voted to expand Medicaid during the sample period.
Long-term healthcare bonds have greater exposure to ACA-associated political risk
relative to shorter-term bonds because there is a greater chance that the Executive and
Legislative Branches will eventually align in agreement to repeal the ACA. The researchers
tested the ACA effect on healthcare yields by bond maturity to identify the political risk effect.
Their evidence indicated that the post-ACA reduction in healthcare yields for debts payable in
more than ten years was 10 basis points, which was significantly smaller than the reduction of
45 basis points for shorter-term debts. The evidence suggests that repeal risk remains a
significant concern for municipal bond investors in the long run.
The researchers additionally found that the ACA effect on healthcare borrowing costs
was weaker in rural counties compared to urban counties. 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 continued to be a major issue for rural
hospitals because many residents in these areas, even if insured, cannot afford to pay the high
deductibles. Consistent with these observations, the researchers found that the decrease in
borrowing costs for urban hospitals (42.4 basis points) was about 62% larger than that for rural
hospitals (25.2 basis points).
Finally, the researchers examined the post-ACA effect on healthcare yields for public
versus private, not-for-profit hospitals. The researchers hypothesized that the post-ACA effect
was weaker for public hospitals, partially because of ACA-mandated cuts to Disproportionate
Share Hospital (DSH) payments, which are typically allocated public hospitals. Consistent with
their hypothesis, the researchers found that the post-ACA reduction in healthcare yields for
private hospitals (42.9 basis points) was about 61% larger than that for public hospitals (26.6
Overall, the evidence from this study indicates that the ACA was a credit-positive event
for hospitals, even with the associated cuts to Medicare payments. As a result, many hospitals
can now borrow capital at cheaper interest rates to finance healthcare infrastructure. However,
the weaker post-ACA effect for long-term healthcare bonds suggests that repeal risk through
political channels remains an obstacle to cheap long-term financing in the healthcare sector.
reports pt 2
In 2016 a new provision in state law went into effect that allows local police and fire pension boards to request the Illinois Comptroller’s office to intercept funds and redirect those monies to the pension systems if municipalities’ pension payments fall short of what their contributions are supposed to be under state law. A premise of the pension intercept is that state intervention can help ensure the fiscal sustainability of local governments and their retirement funds. But does that law work as intended?
Life Preservers or Anchors? An Examination of State Intervention in Municipal Pension Funding in Illinois provides an overview of the law, context about why governments’ pension contributions are a policy concern, and discusses how the law has been working thus far.
Robert Bruno, Amanda Kass, and David Merriman rethink the conversation about pensions and the state’s finances. The near ubiquitous claim that Illinois is facing a “pension crisis” has rarely been challenged. The failure to examine this customary framing of the fiscal condition of Illinois’ five state pension systems limits how policymakers conceptualize their funding strategy. This white paper, jointly authored by researchers from the Project for Middle Class Renewal at the School of Labor and Employment Relations, the Government Finance Research Center and the Institute of Government and Public Affairs (all at the University of Illinois), argues that the “pension crisis” framework negatively influences discussions of policy options.
Dr. Yonghong Wu examines data from Illinois’ 2015 federal income tax filings to estimate the impact of the new $10,000 cap on federal income tax deductions for certain state and local taxes (SALT), which was approved as part of a massive federal tax reform program called the Tax Cuts and Jobs Act of 2017 (TCJA). Preliminary findings in this draft report, are: (1) approximately 15% of all Illinois tax filers (or 896,790 filers) would have been affected in 2015; (2) the estimated average reduction due to the new cap would have been 1.8% (or $2.6 billion) for filers with adjusted gross incomes (AGI) above $200,000 in 2015; and (3) tax filers who would likely see their federal income tax liability increase due to the new cap are likely to be concentrated in the AGI brackets above $100,000 and in municipalities with high property values and high local tax rates. This is a draft report, and should not be cited without express permission from Dr. Wu.
Michael Pagano and Christy McFarland present the findings from the 35th annual report on city fiscal conditions as part of the National League of Cities’ research on city finances. The report finds that the national economy today is strong but faces headwinds from lagging wage growth and a slowing housing market. These complexities are evident at the local level. City finances, which have yet to fully recover from the Great Recession, are showing signs of decelerating growth.
These briefs are abbreviated versions of the white papers authored for the 2018 UIC Urban Forum. The longer versions of the papers are available here.
How the 2018 Elections Reshaped State and Local Governments’ Fiscal Policy Space (2018, Published by Brookings)
This paper by CUPPA’s Dean Michael Pagano and Nathan Arnosti published by Brookings focuses on the ways in which the 2018 midterm elections reshaped state and local governments’ “fiscal policy space” to innovate and govern. Pagano studied the results of state and city ballot measures in an effort to understand the contexts in which voters sought to expand or restrict public services and government spending.
City Budgets in an Era of Increased Uncertainty (2018, Published by Brookings)
This paper, by CUPPA’s Dean Michael Pagano and the California Budget and Policy’s Christopher W. Hoene, examines the extent to which cities can take on greater fiscal responsibilities based on their “fiscal policy space,” a framework for understanding cities’ fiscal capacity and adaptability. The paper includes a typology that assesses 100 large cities on their fiscal capacities, especially in relation to constraints imposed by states or cities’ own tax misalignment with their economic bases. It closes with implications for local and state actions.