Muni bond buyers have high hopes for PPACA

(Bloomberg) — Debt for health-care projects is beating all areas of the $3.7 trillion municipal market.

Muni bond investors seem to be betting on the possibility that the Patient Protection and Affordable Care Act (PPACA) will reduce the number of non-paying patients.

The managers of the S&P Dow Jones Indices track eight types of revenue bonds.

Health-care securities, including securities issued by nursing home companies, have earned 6.4 percent this year.

The bonds in the health-care segment did better than the bonds in any other segment that S&P Dow Jones tracks.

The average return was 5 percent.

Last year, the health-care segment and the entire market fell 2.6 percent.

With municipal interest rates at 11-month lows and defaults in decline, investors have more appetite for the lower-rated obligations that hospitals typically issue.

Investors also are hoping the PPACA coverage expansion provisions will reduce the number of uninsured patients hospitals have to treat.

PPACA "provides a level of stability to the marketplace in terms of knowing that the majority of people are actually covered and you're not going to have this charitable-care component that really varies from year to year," said Lyle Fitterer, a managing director who helps oversee $31 billion of munis at Wells Capital Management.

The share of American adults without insurance fell to 13.4 percent in April, from 15.6 percent last quarter, Gallup said yesterday.

Gallup attributed the drop to PPACA coverage expansion programs.

The pickup in demand for health-care securities extends beyond the municipal market. Corporate health-care debt has earned 4.8 percent this year through May 2, compared with a 4.6 percent increase for all corporate bonds, according to Bank of America Merrill Lynch data.

PPACA makes Medicaid available to people earning as much as 133 percent of the federal poverty line — $11,670 for individuals and $23,850 for a family of four, according to HealthCare.gov. That makes about 30 percent of the uninsured population eligible, Michael Zezas, Morgan Stanley's chief muni strategist, wrote in a recent report.

What's more, an additional 27 percent of low-income individuals without coverage qualify for subsidized insurance through the PPACA public exchanges, Zezas wrote.

Coverage expansion should make health-care institutions' revenue more reliable, Fitterer said.

"While you don't necessarily make a ton of money on the patients that you're seeing through the Affordable Care Act, you're not losing money on them and you get more volume," Fitterer said.

As more people qualify for Medicaid, that may present buying opportunities in munis for systems that have struggled with charity costs and unpaid services, said Bill Black, who manages Invesco Ltd.'s $6.5 billion High Yield Municipal Fund.

"It could be a credit positive," Black said. "It might be a reason to get involved in a hospital that's had more difficult times over the past few years."

Life insurers have about $130 bilion, or 3.5 percent of their assets, invested in munis, according to the National Association of Insurance Commissioners. Life insurers tend to keep holdings in that class small, because they get little benefit from the muni tax breaks that making the securities appealing to retail investors.

Traditionally, consumers and life insurers have seen munis as alternatives to insurance-based retirement planning products.

–With assistance from Alex Wayne in Washington and Allison Bell in New York.

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Muni bond buyers have high hopes for PPACA

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