Bloomberg News
If President-elect Trump’s ideas for healthcare move forward, California’s budget as well its hospitals are likely to face challenges.
The Golden State wouldn’t be alone, as the proposed changes could challenge hospitals nationally.
California went all-in on adopting the Affordable Care Act, the Obama-era initiative to make affordable health insurance available to more people.
ACA adoption, and additional moves to allow undocumented residents to participate in the state’s insurance exchange created under the Affordable Care Act, could be at risk if the federal government makes sharp cuts to Medicaid.
The budget for Medi-Cal, the Golden State’s Medicaid program, in 2024–25 is $161 billion, with the federal government funding about half of it, according
California Gov. Gavin Newsom will introduce his proposed spending plan for fiscal year 2025-26 in mid-January.
“During his first term President Trump sought to repeal and replace the ACA,” Kenneth Kaufman, managing director and founder of KaufmanHall, wrote in Dec. 11 commentary. “Maybe this time around repeal and replace may look more like disrupt and diminish. A best guess here is that the enhanced ACA subsidies will not be renewed. Right away, the stakes are high for hospitals.”
While the sector largely has come back from pandemic-era challenges, Kaufman estimated that 37% of all American hospitals continue to lose money from operations post-COVID.
“For these hospitals, changes to the ACA or Medicaid could provoke an existential financial crisis,” Kaufman wrote. “In these situations, hospitals will likely require more radical operational adjustments, if, in fact, such operational changes are even possible.”
Moody’s Ratings, Fitch Ratings and S&P Global Ratings all have issued stable outlooks for non-profit healthcare over the past few months, but S&P qualified its stable outlook as “stable, but shaky.”
The post-pandemic hospital rebound could be short-lived, Municipal Market Analytics said in its Dec. 16 Weekly Outlook. Medicaid and ACA are likely targets in the budget math to “pay for” the GOP priority of extending and maybe expanding
Susie Desai, a senior director and the sector lead for S&P’s not-for-profit healthcare group, said in an interview that the rating agency’s stable sector outlook for 2025 speaks to the sectors current strength heading into the year, but she added that any changes at the federal level aren’t likely to take place in under a year, because federal changes that vast usually require several months to be put in place.
Since the enhanced subsidies were first enacted in 2021, ACA marketplace enrollment has expanded markedly, Kaufman wrote.
“Today, more than 45 million people are covered by either marketplace insurance or Medicaid expansion provided by the ACA,” according to the U.S. Department of Health and Human Services.
Without enhanced subsidies, the Congressional Budget Office projects that enrollment in the ACA programs would drop dramatically between 2025 and 2026 and further decrease significantly by 2034, Kaufman wrote.
“Obviously, at this time, it’s not possible to estimate the financial impact of withdrawing these subsidies, but it’s clear that hospitals would be affected very significantly as people fall out of the ACA marketplace and the number of uninsured patients rises,” Kaufman wrote.
The potential shuffling of the ACA marketplace may cause underlying insurance rates to rise as the enrollment pool shrinks and healthier people opt out of the program, Kaufman wrote.
Buzz has already started around Republican efforts to reform Medicaid as a series of block grants, he said, potentially shifting more of the burden to individual states.
All of the incoming Trump administration proposals around ACA and Medicaid “threaten hard-earned progress in reducing the number of Americans without health insurance,” Kauffman wrote. That rate has been nearly cut in half since 2010 from 16% of all Americans to 8.2% of all Americans in the first quarter of 2024, he wrote.
“There’s little doubt that changes in ACA and Medicaid will have a very significant financial impact on the healthcare industry,” Kaufman wrote.
“MMA believes that the rating agencies’ 2025 stable sector outlook reasonably reflects the positive bias in the rated universe and considers the potential runway available before the consequences of the incoming administration’s likely policies are realized,” according to its Dec. 16 outlook. “For context, the hospital rating distribution at S&P – the predominant hospital rating agency – places 70% of its universe in the A-category or above.”
Though sector revenue and expenses trended positively in 2024, credit bifurcation in the sector is pronounced, MMA wrote, citing Kaufman Hall’s report that more than a third of hospitals continue to lose money from operations.
“This is also evident in S&P’s rating outlooks; the percentage of issuers with negative outlooks in the BBB and speculative grade categories far exceeds that of the AA and A categories,” MMA wrote, adding the trend is likely to continue if cuts to Medicaid take place.
“Increased revenue pressures and/or higher costs impact already struggling organizations more than well-positioned ones,” MMA wrote.
Healthcare was included as one of the three sectors — the other two are competitive enterprise and senior living — as red flags in the muni bond market continuing to face obstacles, in an October Moody’s report.
MMA’s outlook for hospitals is neutral with caution as of the second half of the year, which it could maintain going forward, or revise to negative, said Lisa Washburn, its chief credit officer and managing director.
“If we were neutral with caution, that caution is growing,” she said.
“Things were getting better,” Washburn said. “If we had had a different outcome to the election, we wouldn’t be as worried.”
The sector largely has recovered from some of the pandemic-era shocks including labor shortages and reducing the use of costlier travel nurses.
“I don’t think we are going into a cycle where they will try to overturn ACA, but on the margin, coverage has been expanded under ACA,” Washburn said.
It’s not only blue states that have created ACA insurance exchanges, said S&P’s Desai; most GOP-controlled states have as well.
“Medicaid is a big number and it’s the only big number left for what the administration wants to do,” Washburn said. “If you look at what the Congressional Budget Office has put out, there is more money that can be extracted from Medicaid than other areas.”
The CBO report, and a nonpartisan
One way to get at that money, Washburn said, is to just let the Medicaid expansion under ACA expire in 2025.
“Even if we don’t want to pay for the tax cuts, there is still a deficit and debt problem, so something needs to happen,” Washburn said.
The CRFB
“With Social Security and Medicare virtually untouchable, and the national interest on the debt, there is not a lot left to cut,” Washburn said.
Given the current geopolitical turmoil, cutting defense spending, another big budget item, isn’t likely to be on the table, she said.
Maintaining the 2017 tax cuts will require a lot of money, and even the Democrats support part of that bill being extended, Washburn said.
“There are a number of ideas coming with the new administration that are not favorable for hospitals, or potentially not favorable, for hospitals — or hospital finances,” Washburn said.
Those policies include suggestions of deportations, which could exacerbate labor shortages, and result in higher wage costs for remaining workers, Desai said.
If the country experiences an economic downturn, and the resultant investment losses, it would create another fiscal challenge for hospital finances, Washburn said.
In 2021-22 when the stock market underperformed, hospitals experienced losses in their investment portfolios, which added to the challenges already being faced by COVID-19 expenses, Washburn said. “Plus, in an economic downturn, people put off elective procedures,” which tend to boost a healthcare systems’ bottom line.
Both S&P and M&A are predicting more partnerships and consolidations, and Republicans tend to favor less regulation, which could make such transactions easier for hospitals, Washburn said.