In the recent presidential election, President Trump highlighted the urgency of repealing the Affordable Care Act (ACA), or Obamacare. Although the efforts of repealing the ACA are already underway, there is not yet a clear plan or guidelines to replace the healthcare policies with something “better.”

As for the healthcare industry, the upcoming changes to the Obamacare and Medicaid are quite concerning as it could impact the revenue earning potential of smaller hospitals and nursing homes. Eventually, there could be repercussions on tax-exempt hospital debt issuance levels from this segment. In this article, we’ll take a quick look at the proposed changes in the healthcare industry under the new administration and how they’ll impact healthcare issuers and investors. We’ll also examine ways investors in healthcare debt can better prepare themselves for the future changes.

When it comes to healthcare and federal funding, there are two main areas of focus: Medicaid and Obamacare.

One of the proposals put forward by Trump administration is to change the federal funding for state Medicaid programs to something called block-grant funding, in which the cost is shared between the federal government and the state. Under the proposed changes, the federal funding will be a fixed sum of money rather than a percentage of cost, thus transferring a major chunk of the funding responsibility to the individual states.

The situation is very similar for Obamacare; the primary funding sources come from various income- tax increments and spending cuts for other federal healthcare programs. Furthermore, Obamacare introduced a separate investment income tax of 3.8% for individuals making over $200,000 per year; this generated healthy revenue streams.

Possible Repeal of the Obamacare: As mentioned earlier, repealing a healthcare law is not as simple as cutting down on funding, as numerous other mandates are also impacted.

Under Obamacare, where over 20 million Americans have access to health insurance, there are other mandates including:

• Mandatory health insurance for everyone or pay a penalty
• Guaranteed coverage for pre-existing conditions,
• Mandatory coverage for children under 26 under their parent’s health insurance

Obamacare provided low-cost, discounted drugs to hospitals. Moreover, it also brought new insurers that created new revenue streams for many hospitals, especially smaller hospitals in rural areas. As these hospitals operate under very tight budgets, repealing Obamacare will force these hospitals to lose currently insured individuals, causing their revenue streams to dry up.

For healthcare debt issuers and investors, this is certainly worrisome for the upcoming future. Soon after President Trump’s victory, the healthcare debt index rose drastically (shown below), because investors demanded higher yields to compensate for the regulatory uncertainties. On similar grounds, credit rating agencies are watching this sector very closely, especially to ensure that revenue streams are strong and bond covenants are not breached.

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This is worrisome for investors looking to get out of their previous healthcare debt investments. The major part of repealing and potentially replacing Obamacare might not come into effect before 2018. If there is no viable option for individuals to obtain health insurance coverages, then it will not only create a huge number of uninsured Americans and but also leave smaller hospitals financially drained.

Let’s take a quick look at two recent issuances and how the repealment of Obamacare might impact them. In conjunction with hospital and developing authorities, Fulton County issued CUSIP 3599008G5, worth $198 million. This revenue bond with strong bond indentures can be severely impacted by the lower number of insurers due to no mandates for individual health coverage. Among the bigger issuers, Henderson Nevada Heath Care Facility issued CUSIP 42503CF1, worth $192 million. This revenue-pledged muni for a project jointly developed by two major cities (total issuance is over $450 million) is at a much better position to bear major changes to Obamacare. The revenue streams, geographic location and infrastructure dependency on more than one or two programs or insurers are much more diversified and safer for muni investors compared to the Fulton County issuer.

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Competitive environment for insurance companies: The Trump administration has proposed that insurance companies sell insurance plans across multiple states, with the goal to improve competition and reduce healthcare costs.

In an ideal situation, states that only have one or two insurance companies dominating the insurance market should create more competition. This would help the states get more individuals (different age groups) to obtain health insurance and take the financial strain off smaller hospitals. In a nutshell, this would encourage muni investors to consider healthcare muni debt floated by such entities in the future.

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Based on the above discussion, these are key factors that investors should keep in mind.

• Investors in healthcare debt should carefully examine their holdings and issuer attributes like cash flow generation capacity, location and demographic factors affecting patient base. If an issuer is heavily dependent on Obamacare to generate its revenue streams, then you may want to explore other investment alternatives provided you are relatively risk-averse.

• Investors should keep a close eye on credit rating changes or opinions for any of their preferred healthcare CUSIPs and seek to shift to higher-rated healthcare providers to preserve principal.

• A diversified portfolio always serves you well, even if it’s heavily concentrated in healthcare debt. Investors should carefully examine client base of the healthcare debt issuer. As for many midwest and southern states, there have been very few insurance providers that dominated. For example, Alabama currently has only two major insurers. Under proposed changes to Obamacare, if insurance companies are allowed to serve across state lines, it may be beneficial to look at those states to diversify your healthcare muni bond investments. This is simply because the insurance companies can take off a certain portion of the financial burden, especially for the smaller and less resourceful hospitals.

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The Trump administration has made repealing the Obamacare one of its main priorities. A word of caution: there are hospitals and healthcare providers that have built or made drastic changes to their infrastructure based on Obamacare, which may not be very sustainable going forward.

Unless you have the ability to take risks and are comfortable investing in relatively higher-yielding healthcare munis, you might be better off if you look at other segments within the muni environment.

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