Muni Credit News March 16, 2017

Joseph Krist











CBO and JCT estimate that enacting the legislation would reduce federal deficits by $337 billion over the 2017-2026 period. That total consists of $323 billion in on-budget savings and $13 billion in off-budget savings. Outlays would be reduced by $1.2 trillion over the period, and revenues would be reduced by $0.9 trillion. The largest savings would come from reductions in outlays for Medicaid and from the elimination of the Affordable Care Act’s (ACA’s) subsidies for nongroup health insurance. The largest costs would come from repealing many of the changes the ACA made to the Internal Revenue Code—including an increase in the Hospital Insurance payroll tax rate for high-income taxpayers, a surtax on those taxpayers’ net investment income, and annual fees imposed on health insurers—and from the establishment of a new tax credit for health insurance.

CBO and JCT estimate that, in 2018, 14 million more people would be uninsured under the legislation than under current law. Most of that increase would stem from repealing the penalties associated with the individual mandate. Some of those people would choose not to have insurance because they chose to be covered by insurance under current law only to avoid paying the penalties, and some people would forgo insurance in response to higher premiums. Later, following additional changes to subsidies for insurance purchased in the nongroup market and to the Medicaid program, the increase in the number of uninsured people relative to the number under current law would rise to 21 million in 2020 and then to 24 million in 2026.

The reductions in insurance coverage between 2018 and 2026 would stem in large part from changes in Medicaid enrollment—because some states would discontinue their expansion of eligibility, some states that would have expanded eligibility in the future would choose not to do so, and per-enrollee spending in the program would be capped. In 2026, an estimated 52 million people would be uninsured, compared with 28 million who would lack insurance that year under current law.

In 2018 and 2019, according to CBO and JCT’s estimates, average premiums for single policyholders in the nongroup market would be 15 percent to 20 percent higher than under current law, mainly because the individual mandate penalties would be eliminated, inducing fewer comparatively healthy people to sign up. Changes in premiums relative to those under current law would differ significantly for people of different ages because of a change in age-rating rules. Under the legislation, insurers would be allowed to generally charge five times more for older enrollees than younger ones rather than three times more as under current law, substantially reducing premiums for young adults and substantially raising premiums for older people.

Over ten years through 2026, a reduction of $880 billion in federal outlays for Medicaid is estimated. In our view, such a reduction in combination with the loss of insurance coverage would create an impact on the hospital sector which would be devastating. And these impacts are with the law as it is. Should conservative opponents prevail in their efforts against a tax credit versus a reduction, the impact would be even worse.

The White House has made efforts to discredit the forecasts from the nonpartisan CBO. “We disagree strenuously with the report that was put out,” Health and Human Services Secretary Tom Price told reporters Monday about the CBO after leaving a Cabinet meeting with President Donald Trump at the White House. “It’s just not believable is what we would suggest.” Ironically, the OMB did an analysis of what it thought the CBO estimate might look like and the analysis found that under the American Health Care Act, the coverage losses would include 17 million for Medicaid, 6 million in the individual market and 3 million in employer-based plans. A total of 54 million individuals would be uninsured in 2026 under the GOP plan, according to this White House analysis. That’s nearly double the number projected under current law.

It is already clear that the final law will not be this bill. Senate Republicans have suggested changes to the bill which would  lower insurance costs for poorer, older Americans and an increase in funding for states with high populations of hard-to-insure people. It was noted that Americans over 60 who earn a little too much to qualify for Medicaid would “have a hard time affording insurance” under the House plan, since insurance premiums would rise far higher than the modest tax credits on offer. AARP has denounced the plan as an “age tax.”


President Donald Trump’s pick to run Medicare and Medicaid was confirmed by a divided Senate as lawmakers engaged in the battle over the government’s role in health care and society’s responsibility toward the vulnerable. Indiana health care consultant Seema Verma, a protégé of Vice President Mike Pence, was approved by a 55-43 vote, largely along party lines. She’ll head the Centers for Medicare and Medicaid Services, the $1 trillion agency that oversees health insurance programs for more than 130 million people, from elderly nursing home residents to newborns. It’s part of the Department of Health and Human Services.

Verma takes over at CMS with the agency facing sweeping changes under the House Republican health care bill backed by Trump. She’s been critical of Medicaid, saying “the status quo is not acceptable” for the federal-state insurance program that covers more than 70 million low-income people. In Indiana, Verma designed a Medicaid expansion along conservative lines for Pence. Most beneficiaries are required to pay modest premiums. And the program uses financial rewards and penalties to steer patients to primary care providers instead of the emergency room. Critics say the plan has been confusing for beneficiaries and some have incurred penalties through no fault of their own.

At her Senate confirmation hearing, Verma defended her approach by saying that low-income people are fully capable of making health care decisions based on rational incentives. She also said she does not support turning Medicare into a voucher plan under which retirees would get a fixed federal contribution to purchase private coverage from government-regulated private insurance plans. Her boss, HHS Secretary Tom Price, is a prominent advocate of such an approach. Medicare covers more than 56 million seniors and disabled people.


A U.S. District Judge granted the Federal Trade Commission and state of Illinois’ request for a preliminary injunction to temporarily stop the merger of Advocate Health Care and North Shore University Health System. The proposal would have created the 11th largest health care system in the U.S., combining Advocate’s 11 hospitals and two-campus children’s hospital with North Shore’s four hospitals.

The two institutions contended that a merger would lead to improvements in care and lower costs for patients. They planned to offer an insurance product 10 percent less expensive than the lowest-priced comparable product available, saving consumers at least $210 million a year. The FTC challenged the deal in late 2015, saying it would probably hurt consumers with higher prices for health care and lower incentives to improve the quality of care. The FTC said the deal would lead to an 8 percent, or $45 million, price increase at the hospitals. The FTC, however, said if the systems merged, they would have had enough leverage to impose price increases on insurers without insurers being able to refuse.

It is currently not possible to analyze the data behind the decision as the judge filed his opinion under seal to give those involved in the case time to request competitively sensitive information be redacted before the opinion is released publicly. This will occur sometime later in the month.  Advocate and North Shore argued the FTC too narrowly defined their market, leaving out competitors such as Northwestern Memorial Hospital and Rush University Medical Center.

Rush University Medical Center, an academic hospital on the Near West Side, Rush-Copley Medical Center in Aurora and Rush Oak Park Hospital in that west suburb are now officially operating as one academic health network. They have a new parent system simply called Rush. The system is positioning itself to be among the handful of local hospital networks still operating in the coming years.

Rush is packaging and selling itself as one overall entity. The framework is based on a research-focused hub with a built-in pipeline of future medical workers (doctors, nurses, researchers) now studying at Rush University. It has about 1,800 physicians and an expansive outpatient footprint, with new sites opening in Chicago’s River North and South Loop neighborhoods, and in Oak Brook. An estimated $500 million outpost on Rush University Medical Center’s campus is underway. Each hospital in the system will retain its own board and management.

Rush Copley is already a market share leader on Chicago’s west side but lacked certain specialists, such as neurologists, on its roster. Through the new structure, patients at Copley can now gain access to those specialists. Rush Oak Park is about to break ground on a new $30 million emergency department, and it plans to add about 30 specialists from Rush University Medical Center. That’s about a third more than this community hospital has now.


The healthcare sector created 26,800 jobs in February, surpassing the 18,300 new positions in January, according to the February jobs report issued Friday by the Bureau of Labor Statistics. Healthcare was among the sectors that drove total national jobs creation in February to a better-than-expected 235,000 jobs. The ambulatory healthcare services subsector grew the most with 18,300 jobs created. Ambulatory services grew by 7,100 jobs in January.

Hospitals added jobs in February as well. Hospital jobs grew by 6,300 positions compared to 1,700 added in January. The industry still needs more workers to care for patients. The aging population remains a long-term demographic driver for the industry.


Moody’s recently released its overview of the credit impact of legislation to repeal and alter aspects of the Affordable Care Act (ACA) on hospitals. It views many of them as credit negative because they would reduce the number of people with health insurance and increase bad debt and uncompensated care costs. However, some elements of the legislation in Moody’s view, such as preserving federal funding for Medicaid expansion for several years, have no immediate credit effect, while others, such as eliminating scheduled Disproportionate Share (DSH) cuts for states that did not expand Medicaid, are credit positive. Components of the legislation most likely to negatively affect hospitals are the Medicaid expansion freeze in 2020, transitioning federal Medicaid payments to a per-capita payment to the states and changes to how subsidies are calculated for people who buy coverage on the exchanges. Restoring DSH cuts to nonexpansion states is credit positive for hospitals in those states. Repealing the individual mandate to obtain health insurance and replacing it with a “continuous coverage” requirement will only modestly increase insurance coverage.

Importantly, the legislation does not repeal Medicaid expansion; states would be allowed to maintain expanded Medicaid eligibility, but they would bear a greater share of the costs starting in 2020. Expansion of Medicaid eligibility has been the single largest driver of insurance coverage gains under the ACA. Starting in 2020, federal support for Medicaid would involve per-capita payments indexed to inflation (currently, federal Medicaid payments are not capped and rise or fall with state expenditures on Medicaid).

We expect that federal payments will grow more slowly than Medicaid program costs, forcing states to make changes that would likely be credit negative for hospitals, including lowering payments to hospitals and other providers, reducing coverage or benefits and reducing targeted payments to safety-net hospitals. States that have not expanded Medicaid would still have the ability to do so before 2020. Eliminating cuts to Medicaid DSH (payments to hospitals that care for a disproportionately large share of uninsured individuals) for the 19 states that did not expand Medicaid would be credit positive for hospitals in those states, particularly for safety-net providers.

Changes to subsidies available to people purchasing insurance on the exchanges would be credit negative for hospitals because they would reduce the subsidy available to many people, prompting them to drop insurance coverage. Subsidies under the legislation would be based on age, with no subsidies available to people who exceed the income threshold. The legislation would also allow insurers to charge up to 5x more for older people than younger people, versus 3x today.

This would lower costs for younger enrollees, encouraging more of them to purchase insurance and contributing to stability on the exchanges. However, this will also raise costs for older enrollees, causing more of them to drop coverage, which is credit negative for hospitals. We believe that the effect of older enrollees losing coverage will outweigh the positive effect of younger people gaining coverage given that older people have greater healthcare needs and as they lose coverage, hospitals would incur greater uncompensated care and bad-debt costs.

Repealing the individual mandate would be credit negative for hospitals because some individuals would drop insurance coverage if they no longer face a financial penalty for not purchasing insurance. However, the credit effect on hospitals is not material given that the current financial penalties for not purchasing insurance are too small to compel many young and relatively healthy people to buy insurance. Likewise, the discontinuation of the mandate is not as material proportionately because the proposed changes to Medicaid expansion are responsible for the majority of insurance gains since the passage of the ACA.

The House legislation replaces the individual mandate with a continuous coverage requirement to incentivize people to purchase coverage. Under continuous coverage, insurers cannot deny coverage to anyone (regardless of pre-existing conditions) so long as they have maintained continuous coverage. If coverage has lapsed, insurers must charge rates that are 30% higher than they would otherwise charge. The ability of the continuous coverage requirement to keep people from dropping insurance coverage in the absence of an individual mandate will depend on the prices of available health plans and the level of subsidies available to offset premiums. However, we do not believe that the threat of a rate increase in the future will be enough to entice relatively healthy people to purchase insurance if they believe they do not need it.


There has been some static on the disclosure front recently which sends at best mixed messages to the market. The Securities and Exchange Commission today voted to propose rule amendments to improve investor protection and enhance transparency in the municipal securities market.

Rule 15c2-12 under the Securities Exchange Act of 1934 requires brokers, dealers, and municipal securities dealers that are acting as underwriters in primary offerings of municipal securities subject to the Rule, to reasonably determine, among other things, that the issuer or obligated person has agreed to provide to the Municipal Securities Rulemaking Board (MSRB) timely notice of certain events.  The amendments proposed by the SEC today would add two new event notices.

Incurrence of a financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

The Municipal Securities Rulemaking Board (MSRB) today endorsed the Securities and Exchange Commission (SEC) for proposing regulatory changes to improve the content and timeliness of disclosure of information about bank loans and other alternative financings entered into by issuers of municipal securities. The risks of these transactions include terms and conditions of alternative financings that may require the acceleration of debt repayment if the borrower encounters financial stress or the dilution of a bondholders’ security position if a bank loan is on parity with or senior to other outstanding debt.

Overall, these incremental improvements are fine but the key is whether they will receive the robust support they will need from a Trump administration. Many market participants are skeptical about the long-term commitment to issuer oversight and disclosure from an administration so committed to the reduction of government regulation in all sectors of oversight. These proposed changes will only help if they are supported by adequate resources, staffing, and leadership at the agency level.


Many times the discussion of disclosure can seem a bit remote especially if you deal with only the larger more well distributed credits. In the healthcare space, the most vulnerable credits are often the one’s with the least robust disclosure practices. These are institutions which because of their relatively small size and infrequent use of or access to the public debt markets, are not attuned to the information needs of investor participants.

These institutions are the kind of hospitals which are vulnerable by their size, service array, and location to the changes in funding included in the proposed AHCA. These are primarily smaller rural institutions which provide a lower level of care or they are specialty institutions which are vulnerable to procedure specific reimbursement changes. The rural institutions tend to be weaker credits for a variety of reasons. They tend to be smaller and their customer bases tend to be older and less economically well off than is the case with large urban based hospital systems. As such, their profitability is more marginal and their ability to develop and accumulate cash on their balance sheets is lessened.

Of the 25 states that have seen at least one rural hospital close since 2010, those with the most closures are located in the South, according to research from the North Carolina Rural Health Research Program. Thirteen hospitals in Texas have closed since 2010, the most of any state. Tennessee has seen the second-most closures, with eight hospitals closing since 2010. In third place is Georgia with six closures followed by Alabama and Mississippi, which have each seen five hospitals close over the past six years.

80 rural hospitals closed between January 2010 and November 2016, as tracked by the NCRHRP. For the purposes of its analysis, the NCRHRP defined a hospital closure as the cessation in the provision of inpatient services. As of November, all of the facilities no longer provided inpatient care. However, many of them still offered other services, including outpatient care, imaging, emergency care, urgent care, primary care or skilled nursing and rehabilitation services.

Our feeling is that this sector has been underrepresented in the public debt markets. It is likely to need to access the market as rates increase and the need to reach more sophisticated investors who are comfortable with risk rises. These more sophisticated investors will tend to need more information in order to meet their own internal and external compliance requirements. The trend of closures and the credit weakness it reflects only heighten the need for good current information.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable, but the reliability of which is not guaranteed.  Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.

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