Why Republican governance is spooking hospitals

The Wall Street Journal – Wednesday, November 27, 2024
By David Wainer

Donald Trump’s likely pick for health chief, Robert F. Kennedy Jr., has grabbed headlines for his anti-vaccine rhetoric and sharp criticism of Big Pharma. But hospitals, not drugmakers, might have more to fear from a Republican government.

With the GOP in control of Congress and the White House, hospitals could face budget cuts and tighter oversight, after a period of benefiting from generous federal spending under President Biden. Much of it comes down to hospitals’ reliance on government insurance programs like Affordable Care Act exchanges and Medicaid that could be cut down to size by Republicans looking for ways to trim government spending and pay for tax cuts.

Medicaid expansions, boosted subsidies for ACA plans and programs like state directed payments—which funnel Medicaid dollars to hospitals—poured billions into the system, benefiting insurers and providers serving these programs. States and the federal government typically pay insurers, who then pay providers like hospitals. In recent years, due to changes in regulations, states have been able to tap additional federal dollars to steer more payments directly to providers. Just in October, analysts at TD Cowen upgraded hospital stocks, citing an expansion of state directed payments in several states.

But Republicans are signaling they may not be as generous, and Wall Street is taking notice. Special ACA tax credits put in place during the pandemic, which expanded coverage to nearly 22 million people, could be allowed to expire in 2025, and Medicaid payments could be capped. John Ransom, an analyst at Raymond James, recently downgraded the hospital sector, citing such risks. He noted that the ACA plans now represent a high-single-digit percentage of hospitals’ overall revenues. While Raymond James and others argue there is still a chance for compromise on ACA and Medicaid, given Republicans’ narrow control of Congress, the probability of headwinds has certainly increased.

Hospital giants like HCA Healthcare and Tenet Healthcare have seen their stocks drop more than 10% since the election, even as the broader market rallied. That is a reversal from the four-year period under the Biden administration, in which Tenet shares more than tripled while HCA more than doubled in value, compared with a 61% gain for the S&P 500.

Some of Trump’s picks for leadership positions also signal a new approach could be coming to the agencies that oversee health spending. The nominee for Food and Drug Administration commissioner, Dr. Marty Makary, has blasted surprise billing and medical debt, which often originate in hospitals. Celebrity surgeon Mehmet Oz, nominated to lead the Centers for Medicare and Medicaid Services, has voiced support for expanding privatized Medicare Advantage plans—a move that could shift power toward insurers at hospitals’ expense, forcing providers to jump through more hoops to seek approval for some procedures. Over at the Justice Department, Pam Bondi, Trump’s likely attorney general, has a history of taking hospitals to task for billing fraud and Medicaid abuse.

“While we do not view Bondi’s history as a direct threat to CMS policy toward hospitals, we see a more payor-friendly and potentially more discriminating stance toward providers shaping in the new administration,” RBC Capital Markets analysts wrote. “Coupled with Trump’s focus on efficiency and waste reduction, we see potential for elevated volatility among hospital stocks in 2025.”

Congress could also act. Programs like 340B, which require drug discounts for hospitals serving low-income patients, and “site-of-care” rules, which let hospitals charge more for outpatient services, are also under scrutiny. Ge Bai, a professor of health policy and management at Johns Hopkins Bloomberg School of Public Health, notes that hospitals are the biggest source of medical debt.

“If I’m a hospital CEO, I would be more concerned by this administration,” says Bai. “With the Biden administration, things were easier to navigate. Now you have things like the DOGE plan to reform the government, you have skeptical people being appointed to health agencies, and that doesn’t bode well for hospitals.”

Hospitals won’t take these risks lying down. As the largest employers in many cities, they wield significant political influence, and their leaders warn that budget cuts could lead to layoffs and fewer beds for patients. Hospitals could also benefit if the Trump administration dials back on Biden’s antitrust stance, as many have relied on mergers and acquisitions to reduce competition and boost growth.

The stakes are high. Hospitals account for about 30% of the $4.5 trillion the U.S. spends annually on healthcare, compared to about 9% for drugs. While pharma and insurers often take political heat, hospitals have consolidated aggressively, sidelining independent doctors and driving up costs. For a GOP looking to curb spending, hospitals could become a target for cuts, even if major legislative changes remain a long shot.

The healthcare debate won’t end with hospitals. Pharma pricing, insurer profits, and inflated salaries for doctors and administrators are all part of the problem of high costs in the U.S. But under Republican control, hospitals might face a reckoning they didn’t see coming.

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