Policy risk in U.S. health care: Impacts less than feared despite the noise

Any change in government administration understandably brings a heightened degree of policy uncertainty. One area where this risk tends to be magnified is within health care, and the new Trump administration is no exception, with uncertainty a nagging sector theme in recent months. Health care services is an area that has garnered considerable attention, given it makes up a significant portion of the total federal budget, at a time when spending is under intense scrutiny. Recent volatility in the managed care, hospitals, and pharmacy benefit manager (PBM) industries directly reflect these heightened policy risk fears. However, during any period of uncertainty, context and knowledge is everything. With this in mind, we take a deeper look into each of these segments, to better understand the potential policy impacts, risks, and opportunities, posed by the new administration.

Managed care

Whereas Trump’s efforts to repeal and replace the Affordable Care Act (ACA, or “Obamacare”) in his first term were more ideological in nature, the current focus on cuts to health insurance programs seems to be less about sector reform and more about finding ways to fund promised tax cuts.

ACA enhanced subsidies

The health insurance marketplace faces the most uncertainty as the enhanced subsidies (designed to lower premium payments for health insurance coverage, allowing greater access for lower‑income earners) are due to expire at the end of 2025. This means that legislation is required to extend the subsidies at a time when fiscal conservatives in the House are pushing for spending cuts and, politically, do not want to appear to be supporting Obamacare. An argument can be made that, given the subsidies are already in place and budgeted for, extending them actually costs relatively little in the scheme of things, similar to the debate around the use of “current policy” baseline to extend the Trump tax cuts. However, many Republicans want to see budgetary savings made no matter what, and letting the enhanced subsidies expire might be seen as a means to this end. If the subsidies are not renewed, this would likely lead to increased health insurance premiums and out‑of‑pocket costs for millions of Americans, decreasing ACA plan enrollment and increasing the uninsured population.

Medicaid

President Trump has publicly stated that he is committed to reducing federal spending and delivering on his campaign promise of large tax cuts. However, relatively few federal programs are big enough to achieve these twin aims (Figure 1). He has already stated that Social Security, Medicare and Medicaid cuts are off the table, although he has left open changes to policies to cut down on “fraud, waste, and abuse.” It is under this mantra that Medicaid, the joint federal‑state program providing coverage for 72 million low‑income and disabled Americans, could still be in the crosshairs for potential spending cuts.

While Medicaid has previously been flagged as an area where cuts need to be found, some of the feared worst‑case scenarios appear to have been ruled out. For example, early suggestions of sweeping changes to the way Medicaid is funded, replacing the current federal match system with block grants or per capita cash payments–aimed at slowing the growth rate of government spending on Medicaid over time—have not progressed. Instead, the primary focus now appears to be on reducing fraud, waste, and abuse in the system, essentially cracking down on those who do not meet Medicaid criteria. Tighter eligibility standards, including increased work requirements, is a consensus view that most stakeholders seem to be on board with implementing. From a policy perspective, this is certainly at the lower end of the impact spectrum, and markets have reacted positively with managed care stocks rebounding notably from earlier‑year lows.

Hospitals

Publicly traded for profit hospitals (owned and operated by private companies or investors) have historically been relatively well shielded from budgetary cuts due to the industry dynamics, where the majority (around 80%) of U.S. hospitals are not‑for‑profit with a greater government payor mix (programs like Medicare and Medicaid) and slimmer margins. Politically, the hospital lobby is also very powerful. Hospitals are among the largest local employers in many states and congressional districts.

"Politically, the hospital lobby is also very powerful. Hospitals are among the largest local employers in many states and congressional districts."

Medicaid

While it seems that this policy option has been ruled out for now, any potential changes to the Medicaid funding mechanism widely used by all states is a key policy risk for the hospital sector. The current federal matching program is an important and generous source of income for the states, with a good portion of this flowing directly through to hospitals. However, it is no secret that the funding mechanism works in favor of the states, hence the noise being made by federal conservatives about changing the way it works. Given that all states benefit, there is a strong lobbying effort that is resistant to such change. Indeed, provisions in the 2025 Reconciliation Bill, passed by the House of Representatives on May 22, targeted capping, rather than eliminating, the use of state funding mechanisms, which is a positive for the hospital sector.

More broadly, proposed policy changes to Medicaid aimed at setting a higher eligibility bar, ultimately resulting in less people being covered, remains a risk for the hospitals sector. More uninsured patients needing treatment would lead to an increase in uncompensated care and hospital bad debts.

Site‑neutral proposals

Another, albeit smaller, risk for the hospitals sector relates to so‑called site‑neutral policy proposals, aimed at “equalizing” Medicare payments for the same services across different health care settings. This proposal would prevent hospitals from receiving more money from Medicare for simple outpatient procedures and imaging that can be performed in less expensive settings, like a physician’s office. To date, site‑neutral reforms have been excluded from the Reconciliation Bill but could still feature in future legislation. The public hospitals sector does not seem especially worried about this policy risk and its potential impacts. In our view, they may even be willing to accept limited site‑neutral reforms to take some focus off other, potentially more impactful, policy measures, such as the previously mentioned changes to state funding mechanisms.

Pharmacy benefit managers (PBMs)

President Trump has previously signaled that reform of PBMs–third parties that negotiate costs and payments between drug manufacturers, pharmacies, and insurance providers–is a priority, and there is growing bipartisan support for greater PBM transparency and accountability amid spiraling prescription drug costs.

The recently passed Reconciliation Bill included some restrictions on PBM practices within Medicare and Medicaid. However, the impact of these changes is relatively small, so PBMs are not exposed to significant risk in terms of potential budget cuts. Elsewhere, recent discussions around implementing a “Most Favored Nation” drug pricing policy have included the possibility of eliminating the “middlemen.” However, there are few practical pathways to do so without making incremental changes to legislation and changes to commercial market structures.

Health care services continue to be a pivotal issue for numerous stakeholders—including government officials, federal agencies, payers, providers, and the voting public. As is always the case, any change in administration adds uncertainty and risk to the outlook, and this is likely to remain the case in the near term. Encouragingly, specific policy measures impacting the health care services area look less significant or onerous than previously feared. That said, we are still relatively early in the legislative process, with revisions to the Reconciliation Bill still pending in the Senate. Only as the year progresses will we get more clarity on individual policy decisions, including where budgetary cuts will come from, and the key areas of impact. While many of the specifics remain uncertain, understanding the context of policy proposals and what may or may not ultimately be achievable, is important for investors weighing the risks and opportunities across different health care industries and individual companies.