Yesterday, the House of Representatives passed the American Health Care Act (AHCA). Broadly speaking, the bill is similar to the version put forth several weeks ago that did not make it to the floor of the House. Now, as the bill moves to the Senate for approval, early indications from key senators suggest that the Senate’s Affordable Care Act (ACA) replacement proposal will be very different from the House’s proposal. Still, municipal investors should keep the following in mind as this legislation moves forward.
1. Tax reform regulation is likely delayed: Renewing efforts to repeal and replace the ACA will likely delay when Congress is able to tackle tax reform. If passed in its current form, the AHCA would theoretically improve the odds of a tax reform package because of the following:
a. It reduces spending on Medicaid by nearly $1 trillion over 10 years, which generates savings to pay for a big tax cut.
b. It eliminates the 3.8 percent Medicare surtax on net investment income for those earning over $250,000 per year. This lowers the top marginal rate, which makes future reductions from the new top rate look less costly.
However, in reality, the Senate bill is likely to be substantially different from the House’s proposal. A lot more work is required before anything moves to the President’s desk. Hence, we expect tax risk to decrease in the near term.
2. Infrastructure measures are delayed: For the same reasons that tax reform will likely be delayed, any infrastructure bill will likely be delayed as well. Notably, this week at the 2017 Milken Institute Global Conference, Transportation Secretary Elaine Chao remarked that infrastructure will be done after tax and health care reform.
3. Slightly higher risks for Hospitals: Passage of the AHCA by the House and the handful of health care reform proposals from the Senate suggest that Republican lawmakers are looking to reduce exchange and Medicaid subsidies. If a health care bill passes, it will likely be a credit negative for hospitals—even under the best case scenario.
Consider the Patient Freedom Act, a bill proposed by four moderate Republican Senators this year. This bill would devolve much of health care decision-making authority to the states. Each state would receive an allotment of 95 percent of its existing ACA exchange and Medicaid subsidies. The bill appears to leave traditional Medicaid untouched, but it would likely be a negative over the long term in many states.
In terms of our tax-efficient strategies, Breckinridge’s Hospital holdings are high quality, which we believe can help foster resilience in periods of regulatory or other stress to the sector.
4. Slightly higher risks for States: For the same reason that risks are higher for Hospitals, risks are likely higher for States. If reductions in federal subsidies for the exchanges or expanded Medicaid occur, those costs would likely fall to the States. States would have to raise revenue or cut spending to maintain support for health care costs, going forward.
It is widely anticipated that the Senate will take up repeal/replace legislation in the coming days and weeks. We will continue to closely monitor health care reform as it moves through the Senate.
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