Health reform ruling leaves uncertainty for municipal bonds

Nonprofit hospitals may come out of the legal firestorm over the Patient Protection and Affordable Care Act as more stable and tempting investments as the number of patients who can’t pay for care decreases, according to recent reports -– but uncertainty lingers and could dampen that effect.

Optimistic reports surfaced almost immediately after the release of the June 28 U.S. Supreme Court decision, which ruled the health law’s expansion of Medicaid eligibility and individual mandate to buy insurance are both constitutional.

“It means a measure of stability for the hospital bond market and for providers who have spent the last two years preparing for the new law,” said a June 28 report in The Bond Buyer, a daily New York newspaper focused on the municipal bond market.

Nonprofit hospitals can tap the market for municipal bonds, which are issued by a city or local government to help finance projects that would benefit the public.

Hospital-backed bonds make up more than one-tenth of a $3.7 trillion municipal bond market, according to Bloomberg Businessweek.

In Springfield, both CoxHealth and St. Louis-based Mercy have waded into that market, though hospital spokeswomen declined to specify how much debt either system backs.

Investors have traditionally seen these bonds as riskier than others, because hospitals are bound to help patients who can’t pay for care and because hospital municipal bonds are backed by hospital revenues instead of government funds.

Just more than one in 20 patients come into Mercy and CoxHealth unable to pay, according to hospital officials, while almost one in six are covered by Medicaid.

That traditional view, however, could change as health care reform moves forward.

The individual mandate and Medicaid expansion are meant to increase the number of patients who can pay for their health care, which would in turn plug the leak in hospital revenue, shore up some investor concerns and potentially increase patient visits.

According to government estimates, more than 1.1 million Missourians are enrolled in Medicaid, a number that could increase 30 percent if eligibility expands to everyone whose income is at or below 133 percent of the federal poverty line.

Several studies, including one last year from the Harvard School of Public Health, have shown people are more likely to get necessary health care if they know they can pay for it.

“Assuming that all the provisions go into play, (the health care law) is going to increase demand for services,” said Reed Olsen, an economics professor at Missouri State University who specializes in the economics of health care. “So it’s going to make (hospitals) more attractive investments.”

As a result of the Supreme Court decision, health care systems also were spared the disruptive impact of throwing out the health care law, for which the industry has been preparing for two years.

All of this, some analysts said, is good news for nonprofit hospitals.

But, as is often the case with health care reform, the truth appears to be more complicated.

Doubts in a bond boost persist especially after bond markets defied Businessweek’s predictions and remained stable after the Supreme Court decision, according to reports in the Wall Street Journal.

Moody’s Investors Service, which rates municipal bonds and investments according to risk, released a report saying the decision would have a neutral effect on the health care industry.

The report cited the nation’s hyperpartisan political climate, an uncertain November outcome and a Republican party hungry for repeal of the law. It also pointed out the reform law would gradually trim tens of billions of dollars in Medicaid payments through the next decade in its effort to rein in part of the federal budget, potentially hurting hospitals in the longer term.

“Uncertainty makes for bad investment risk,” Olsen said. “I think there’s a certain amount of uncertainty going forward here ... respective to this legislation. And that’s across the board.”

Whether Missouri takes part in the Medicaid expansion is also up in the air, after the Supreme Court also ruled that the federal government couldn’t withhold funding from states that refused, as the law originally allowed. The Congressional Budget Office recently reported that 3 million fewer people across the country would end up covered by the law because of this change.

Gov. Jay Nixon has supported expanding Medicaid in the past but has remained largely mum on the issue after the Supreme Court decision, while Republicans in the state legislature have vowed their opposition to such a measure.

“We will likely not know the full impact until the (Affordable Care Act) is fully implemented several years from now, including how the marketplace views the favorability of bonds issued by health care providers,” said Mercy Chief Financial Officer Chris Knackstedt, in an email. “No one ever knows what the market will do. It often depends on public sentiment, which is impossible to predict.”