Briefs, Research Reports & White Papers

Good for your Fiscal Health? The Effect of the Affordable Care Act on Healthcare

Borrowing Costs
Pengjie Gao
University of Notre Dame

Chang Lee
Korea Advanced Institute of Science and Technology

Dermot Murphy
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Hospitals also became exposed to the risk that key subsidy provisions would be repealed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
the ACA.

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
basis points).

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.