[OSCR, CNC, HCA, THC, WELL] Optimistic on ACA Subsidies, But Watching Other Risks
While investors in insurers and providers seem most concerned about the fate of the expiring enhanced ACA subsidies, which we still expect to be revised but ultimately extended later this year, other – albeit smaller – risks are brewing that could crimp enrollment and revenue flow for insurers (OSCR, CNC, ELV, MOH), hospitals / surgery centers (HCA, THC, ARDT, CYH, SRGY), and indirectly medical office REITs (WELL, DOC, HR).
Against a backdrop of the 2025 exchange enrollment reaching its highest levels of at least 24.3 million, according to CMS, we have compiled a list of potential legislative and regulatory threats that inject uncertainty into Obamacare, including those referenced in President Trump’s “day one” executive orders or a recently reported House Republican menu of budgetary savings options.
Some of these were previously promulgated during Trump’s first term, such as expanding short-term medical plans and reinstituting broader use of association health plans, with their resurrection widely expected, and we would not expect these to meaningfully erode ACA enrollment. Others, however, seem less well appreciated by investors but could nevertheless narrow the exchange markets and reduce the attractiveness of Obamacare enrollment.
At this point, they all merit watching, as it is too early to fully assess their enactment odds. However, we think those policies aiming to address overpayments or inappropriate sign-ups (e.g. excess premium recapture, limit enrollment to citizens) or allowing for cheaper alternatives (e.g. short-term plans, association health plans) have broader appeal than those that risk slashing enrollment or raising premiums (e.g. family glitch or high-risk pools).
Enhanced ACA Subsidies
As we have written previously, we continue to believe that Congress will reach a middle ground on the enhanced ACA subsidies set to expire at yearend, likely within a reconciliation package, despite the need for additional budgetary offsets. Such a potential compromise likely maintains the bulk of enrollment, mitigating the threat of higher uninsured levels / bad debt and reduced enrollment.
Specifically, we think enough Republicans – given their narrow majorities – will balk at seeing their constituents losing subsidized coverage / higher premiums should the enhanced tax credits expire and revert to prior levels. The most likely path to compromise, in our view, would therefore include the following:
- Reinstates a subsidy cliff (i.e. the income ceiling for subsidy eligibility) at either the original 400% of the federal poverty line (FPL) or a lower amount (e.g., 350% FPL), which resembles the income threshold of 2017 ACA repeal-and-replace. We note that ~80% of 2024 enrollees have incomes up to 300% FPL, ~10% with incomes 300%-400% FPL, and the remaining ~10% with incomes greater than 400% FPL, according to CMS figures.
- Adjusts the maximum threshold for enrollee premium contributions, which is currently set at 8.5% of household income. That ceiling had previously been set at 9.83% in 2021 before the statutory enhancement.
- Provide zero-premium plans for those with incomes up to 100-150% of FPL, in-line with current law.
One sleeper idea to consider that could be incorporated into the above mix is to lower the upper income threshold for Medicaid expansion from the current 138% FPL to 100% FPL. This would potentially shift this population from Medicaid to Obamacare and could result in reduced federal spending. The right-leaning Paragon Health previously recommended this change, among others, but so far, we have not seen much in the way of public support GOP lawmakers.