As ACA repeal loses steam, hospital bonds attractive
PHOENIX — Some analysts see an opportunity in hospital bonds, as the spreads in that sector have continued to widen even as the push to repeal the Affordable Care Act loses steam.
Morgan Stanley analysts said in a Monday report that the hospital sector may offer investors an opportunity because the potential value those bonds keeps increasing even though the perceived risk of a hasty repeal of Barack Obama's signature "Obamacare" law seems to be diminishing. While Republicans have campaigned for years on repeal of the ACA, public support for a repeal without a replacement plan in place appears to have fallen, and Republican Congressmen have been bombarded with protests against ACA repeal in a number of town hall meetings in recent weeks.
Analysts have said that ACA repeal could pressure hospital bonds, particularly since 30 states expanded Medicaid under the law and provided hospitals with reimbursement payment revenue that they could lose if the law went away. Trump had publicly supported repeal of Obamacare and pledged to repeal it quickly after taking office, rhetoric that helped drive spreads on hospital credits wider.
"We initially thought a 'repeal and delay' effort would be swift, following the path laid out by bills passed through Congress, but eventually vetoed, in 2015," Morgan Stanley said. "Yet Republicans have increasingly expressed hesitancy about this tactic on concerns that any interim weakening of healthcare coverage would become their political liability, rather than the Democrats'. Hence, the risks are increasing that ACA action both takes longer than expected and, when it occurs, could impact health coverage levels, and hence hospital margins, less severely than previously anticipated."
The spread between the S&P Hospital Index and the Main Muni Index has grown wider since Donald Trump's election in November, climbing from around 40 basis points in November to about 55 now.
"Hence, while hospitals may not be fully clear of their previously feared political risks, they should increasingly appeal to investors seeking yield," said Morgan Stanley."