Investors are increasingly wary of non-profit healthcare providers under pressure from federal policy shifts, with some hunting for opportunities as spreads widen across the nearly $250 billion sector.
The sweeping reconciliation bill that
The House-passed bill cuts Medicaid by nearly $800 billion, and introduces other potential pain points, like restrictions on the Affordable Care Act's insurance marketplace and a moratorium on the introduction or increase of provider taxes that states use to cover Medicaid expenses not covered by federal funding.
The reconciliation bill is now in the
The Congressional Budget Office projects the "One Big Beautiful Bill" and ACA marketplace restrictions would led to nearly 16 million more uninsured people when fully phased in by 2034 — a 50% increase in the number of people who are currently uninsured,
The Urban Institute estimates the legislation would lead to a decline of $771 billion in healthcare spending, with $306 billion among hospitals. The bill would also cause an increase of $198 billion in uncompensated care, the group said.
In a statement after the House passed the bill, the American Hospital Association warned of tough times ahead. "Hospitals — especially in rural and underserved areas — will be forced to make difficult decisions about whether they will have to reduce services, reduce staff and potentially consider closing their doors," said AHA President and CEO Rick Pollack.
The high stakes for providers are outlined in bond offering documents from AdventHealth for a June borrowing. The top risk listed for bondholders is a "shifting political landscape for healthcare in the U.S."
"The evolving priorities and policies of the new Trump administration may have a significant effect on the health care industry," the borrower warned in its extensive "bondholder risk" section.
The documents outline a litany of headwinds coming from Washington, D.C. ranging from new federal agency leadership to Medicare and Medicaid reimbursements to efforts to weaken the Affordable Care Act and the impact of tariffs on medical products.
"Although the specifics of the health care policies to be implemented under President Trump's administration remain to be seen, the effect of these policies on the obligated group's operations and finances could be material," the issuer said.
The pressure is showing up in widening spreads in the sector. Hospital index spreads versus the triple-A index were at plus 17 basis points in Dec. 31 2024, according to CreditSights. They've since widened to plus 47bps and closed last Friday at plus 46bps, CreditSights senior municipal strategist Pat Luby said.
"That's close to the widest of the year and it's a much bigger move than other sectors," Luby said. "This is really driven by concern around the credit fundamentals of this sector."
New issues are also going to have to price wider to clear the market, Luby added.
Hospitals have also notched the worst performance among sectors so far this year, at negative 2.93%, CreditSights said.
"This doesn't mean that investors should be exiting the sector or reducing their exposure, but it does mean that they need to be mindful of what hospitals they do own," Luby said. The market "needs to be paying attention to what's happening with the One Big Beautiful Bill," Luby added.
If the final bill dials back some of the deep Medicaid cuts, it presents an opportunity for investors, he said.
"The sector is underperforming and there's wider spreads so there could be some opportunities," Luby said.
Income Research + Management is in the midst of searching for those opportunities, senior portfolio manager Wesly Pate said in a recent
The firm is pulling back from rural hospitals, which it sees as particularly vulnerable, and shifting allocation toward providers that may be better positioned to face the headwinds.
"Those with more fortified balance sheets and beefier margins are the ones that'll weather the storm quite well," Pate said.
The sector is not yet showing signs of bifurcation among credits, Pate added. "That is in and of itself a rotation opportunity, and so we're looking to take advantage of that," he said.
PGIM is also avoiding specific provider types that it views as vulnerable, the firm said in an April 23 note. "That includes safety-net hospitals which serve a high percentage of Medicaid patients; rural providers which also have elevated levels of lower-income patients; and to a lesser extent, children's hospitals and academic medical centers — both of which have elevated exposure to Medicaid," the firm said.
"Valuations in this sector have become rich over the course of the past year which, in concert with possible pending Medicaid cuts, has contributed to our decision to reduce exposure to lower-quality names," PGIM said.
In a May investor note, BlackRock noted that healthcare providers operate with tight margins but have "historically demonstrated resilience in the face of policy and economic headwinds," the firm said.
"We continue to identify attractive investment opportunities in high quality, single- and double-A-rated healthcare systems," BlackRock said. It pointed to Bon Secours Mercy Health and Corewell Health as "both offering compelling absolute yields."
