Issue 15

On March 11, President Joe Biden signed the $1.9 trillion stimulus package known as the American Rescue Plan (ARP) into law. The massive package includes direct payments to households, aid to state and local government, and aid to small businesses that are intended to catalyze the nation's economic recovery and pandemic efforts.

At the same time, the ARP is also an important piece of U.S. health care legislation because it creates funding for health coverage expansion and financial assistance at a time when it is greatly needed. Overall, S&P Global Ratings views the ARP as a modestly positive credit event for the health care sector. However, we expect no direct rating actions due to the temporary nature of many of the health care provisions.

ARP's Coverage Expansion Is Key For Insurance And Health Care Providers

We expect the ARP will accelerate the economic recovery, which bodes well for insurers, hospitals, and providers. Close to half of Americans receive insurance coverage from employer-based health insurance, which should benefit from stronger job growth. The ARP will also bolster non-employer-based health coverage by directly funding ACA exchanges, Medicaid expansion, and Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage.

Enhanced premium subsidies will spur growth on ACA exchanges

We expect the ARP will increase near-term enrollment on ACA exchanges, which will drive premium growth for health insurers and revenue for providers as more insured individuals access and receive care. The Congressional Budget Office (CBO) projects ACA exchange enrollment could increase by 1.7 million members in 2022, with growth predominantly coming from the uninsured.

The ARP will achieve market growth by temporarily increasing the amount of premium subsidies that consumers can receive to purchase ACA exchange products. It also expands who is eligible for these subsidies by eliminating the "subsidy cliff," which normally disallows consumers making more than 400% of the federal poverty level (FPL) from receiving subsidies. These two subsidy changes are in effect for 2021-2022. The ARP will also allow consumers receiving unemployment insurance to qualify for premium and cost-sharing subsidies they normally would not quality for. This subsidy change is in effect for just this year.

The temporary nature of the ARP's various subsidies creates future policy risks and minimizes the credit impact from this part of the legislation for both insurers and providers. Given that the premium subsidies' expiration could lead to premium spikes for some consumers in 2023, we expect the topic of extending or making them permanent will come up relatively soon by policymakers. This could happen in a discussion of broader health care reform proposals later in 2021, or during the 2022 midterm elections.

The ARP provides extra funding for states to expand their Medicaid programs

We expect the ARP's Medicaid expansion incentives, if states take them up, could also drive premium growth for insurers and revenue for providers. Currently 12 states, including states with large populations such as Texas and Florida, have yet to expand Medicaid to all adults making up to 138% of the FPL. According to the Kaiser Family Foundation (KFF), roughly 4 million of the uninsured could gain insurance coverage if these 12 states were to pursue Medicaid expansion.

It's unclear whether any of the 12 states will pursue Medicaid expansion. ACA provisions already call for the federal government to pay for 90% of each state's Medicaid expansion costs. The ARP adds two years of extra federal funding in the form of a 5% add-on to each state's Federal Medical Assistance Percentage (known as FMAP) to help each state cover the costs of their standard, nonexpansion Medicaid population. Unlike other ARP coverage provisions, the extra Medicaid incentives don't appear to have an expiration date, so states will have time to decide.

The ARP's 100% COBRA subsidies may temporarily benefit insurers and providers in different ways

COBRA coverage allows consumers who lost their jobs or had their hours reduced to keep their employer group coverage for 18 to 36 months on an unsubsidized basis (without employer subsidies). The ARP provides funds that subsidize 100% of COBRA insurance premiums until the end of September 2021. In comparison, during the last economic downturn, the American Recovery and Reinvestment Act of 2009 provided a 65% COBRA subsidy.

We view the ARP's 100% subsidy as a positive, if temporary, development for insurers and providers. It could increase COBRA enrollment by at least 2.2 million, on a full-year basis in 2021, based on a CBO analysis of an earlier, less generous proposal (85% subsidy). For insurers, the 100% subsidy may help offset the risk of adverse selection because unsubsidized COBRA can predominantly attract high cost members. For providers, higher COBRA enrollment may temporarily help their payor mix because COBRA members will still be enrolled in employer group plans that pay commercial rates.

Direct support for rural health may support a subset of providers

The ARP will direct $8.5 billion to rural health providers to help cover lost revenue and expenses related to COVID-19 and dedicate $500 million for rural health care grants. The $8.5 billion could have a meaningful impact on this subset of providers--especially as many struggled even before the pandemic. We believe that some health care providers we rate could benefit from this funding, but it is likely limited and targeted.

Home- And Community-Based Services Gets Some Needed Relief

The ARP is likely to provide some much needed relief to the home- and community-based services (HCBS) subsector given the package provides a higher-than-expected rate boost on the FMAP--a significant allocation to state and local governments--and excludes the long-debated $15 minimum wage amendment.

Home care's boost to FMAP was 10%, up from an expected 7.35%. The FMAP is an allocation in which the federal government jointly funds a significant portion of the Medicaid costs largely borne by states. Home care companies operate with a payor mix that is largely dependent on Medicaid and therefore reliant on state budgets, which were significantly affected by the pandemic.

While the entire home-care industry faced significant disruption during the pandemic and is likely to benefit as a whole from the stimulus, we see particular support for the personal/community care segments, in which low-skilled staff provide general non-medical assistance with basic daily tasks. During the pandemic, geographic hot spots such as New York saw extended quarantine periods, in which non-medical personnel were unable to enter residences, disrupting home-care services and straining providers as they attempted to retain staff.

In addition, a large portion of the ARP will be used to support state and local budgets, which will likely have a residual impact on Medicaid programs. Excluding the minimum wage increase from the ARP also benefits home-care providers in retaining staff in a cost efficient manner. Although the relief is temporary, of the home-care providers we rate, we see BW Homecare Holdings LLC (doing business as Elara Caring), Pluto Acquisition I Inc. (doing business as AccentCare Inc.), and Gentiva (doing business as Kindred at Home and Kindred Hospice) benefiting from the stimulus.

Pharmaceuticals, Life Sciences, And Diagnostics Subsectors Continue To Benefit Well Into 2021

The ARP should also extend the strong performance in the pharmaceutical, life science, and diagnostic subsectors from COVID-19-related sales and offset pandemic-related declines in revenues relating to elective procedures. The ARP allocated $20 billion to aid COVID-19 vaccine manufacturing and distribution, along with $50 billion for testing and contract tracing. The increases in spending should not only accelerate vaccinations, but also increase demand for related medical products, such as syringes, vaccination kits, and diagnostic testing, all further benefiting the pharmaceutical, life sciences, and diagnostics subsectors.

These subsectors were already among the least hurt within the broader health care sector during the pandemic (see "The Health Care Credit Beat: A Rapid Bounce Back In Demand Accelerates the U.S. Industry's Recovery Timelines," Sept. 16, 2020). Indeed, with the drastic increase in COVID-19-related demand for medical supplies and diagnostic tests more than offsetting the drop in demand associated with the suspension of elective medical procedures, companies in these subsectors have seen a net financial benefit that has increasingly been reflected in earnings, such as Thermo Fisher and Danaher. The tailwind has also has partly contributed to recent positive rating actions, including those we took on Abbott Laboratories, PerkinElmer, and Becton Dickinson. We had projected that COVID-19 product demand could moderate in the second half of 2021 as hopefully the pandemic continues to recede by then. However, the ARP increases the likelihood we could take further positive rating actions in the sector.

On the pharmaceutical front, we currently do not envision any positive ratings impact, despite the strong sales of the approved COVID-19 vaccines in the U.S. from Pfizer, Moderna, and most recently Johnson & Johnson. Pfizer expects it will generate $15 billion in vaccine sales in 2021, roughly a quarter of its projected sales for the year. Still, positive rating actions due to strong COVID-19-related sales are unlikely for the pharmaceutical companies we rate because longer-term revenue opportunities remain unknown, there are several competing vaccines under development that can significantly divide the market, and we remain focused on the industry's longer-term challenges, such as pricing pressure and potential increased mergers and acquisitions. As such, we maintain a negative ratings outlook on the industry (see "Pharma Outlook: Eighth Straight Year Of Credit Deterioration In 2021," Feb. 23, 2021).

What's Next

The Biden Administration may be taking a multistep approach to health care reform, one we generally characterize as "ACA 2.0." Its first step was to use executive orders to affect health care policy. For example, the Administration used executive orders to reopen ACA exchanges for a "special enrollment period" (Feb. 15 to May 15). It also directed federal agencies to reverse or reexamine health policies and rules the prior Administration enacted, including those that may limit health care access through the ACA exchange and Medicaid programs.

The ARP represents the next step in health care reform--but likely not the last given that many of its changes are temporary. We expect future legislative sessions will reassess whether to make the ARP's coverage expansion provisions permanent. If the ARP improves the popularity of the exchanges, this would make it more likely to happen. Moreover, policy proposals such as the "public option," which we view as a low probability/high-risk scenario for the sector, may resurface in policy discussions. Drug pricing, industry consolidation, and Medicare solvency could come to the forefront as well—each bringing new policy risks for the sector.

Related Research

• Pharma Outlook: Eighth Straight Year Of Credit Deterioration In 2021, Feb. 23, 2021
• Within Reach: How Stimulus Proposals Lift U.S. GDP To Pre-Pandemic Levels, Feb. 1, 2021
• U.S. Health Insurers' Credit Quality Will Likely Hold Up In 2021, Jan. 14, 2021
• Outlook For U.S. Not-For-Profit Acute Health Care: Navigating The Bumps While Getting Back On Track, Jan. 12, 2021
• The Health Care Credit Beat: A Rapid Bounce Back in Demand Accelerates the U.S. Industry’s Recovery Timelines, Sept. 16, 2020