Good for your Fiscal Health? The Effect of the Affordable Care Act on Healthcare Borrowing Costs

We study the effect of the Affordable Care Act (ACA) on hospital credit risk through the municipal finance channel. The ACA reduced demand prices for consumers but also increased government monopsony power over hospitals. Healthcare yields decreased by 39 basis points relative to non-healthcare yields following a favorable ACA Supreme Court ruling in 2012, suggesting that the demand effect dominates. We further identify the demand effect by showing larger yield reductions in Medicaid-expansion states and urban areas. Weaker effects are observed for public hospitals and long-term bonds, suggesting that government monopsony power and long-run uncertainty are also important determinants of hospital credit risk.