Mikhail Foux and Vikram Rai of Citi Research issued a report today focusing on the impact of the Affordable Care Act on the U.S. municipal bond market. The 10-page report detailed the analysts’ perspectives on the impact of specific provisions of the ACA, or Obamacare, on bond issuers such as nonprofit hospitals.

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ACA-mandated IT expenses

Foux and Rai point out that most larger hospital systems are going to have to make significant investment in IT infrastructure over the next couple of years to comply with the ACA’s provisions regarding electronic health records and data security. While there will be a long-term repayment of the investment in improved efficiencies and there are some funds earmarked in the ACA for these initiatives, the analysts point out that additional IT expenses are yet another financial stress in a time of decreasing revenues.

Shortage of primary care health professionals

The Citi report also highlights the fact that we are already suffering a shortage of primary care providers in the U.S., such as family practice doctors, physician assistants and nurse practitioners, and that this shortage is certain to significantly worsen with the influx of millions of new patients as Obamacare rolls out. Foux and Rai take this argument to its logical conclusion and point out the shortage of health care professionals is also inevitably going to lead to an increase in labor costs for hospitals and clinics.

Obamacare means more patients, but less money per patient

As many as 50 million new patients will be added to the health insurance rolls over the next few years due to Obamacare, and this alone will place significant stresses on the health care system, especially among Disproportionate Share Hospitals. DSH are hospitals that treat a large percentage of low-income or uninsured patients.

The Catch-22 for nonprofit hospitals here is that the ACA also reduces Medicaid reimbursements. When you add that to sequestration-required cuts to Medicare, these hospitals are in effect being asked to take care of more patients for significantly less money.

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Nonprofit hospital muni bond strategy notes

Given the looming impact of the ACA, Citi’s recommendations for investing in nonprofit hospital muni bonds are two fold —

1) Stick with “concentrating on financially sound hospital systems that are well-prepared to deal with the aftermath of the ACA”, and

2) Avoid smaller, weaker hospitals in states that did not accept the Medicaid expansion.