The enactment of the Patient Protection and Affordable Care Act (ACA), signed into law on March 23, 2010, represents a significant legislative milestone in healthcare reform and a continuing communications challenge for providers. As we approach the mid-point of the law's 10-year implementation trek, a look back at the healthcare investor market shows that despite some favorable investment returns, the jury's still out on the law's long-term prognosis.
To understand the ACA's impact on investor markets, a useful technique is to compare how providers have performed over the past five years vs. the overall economy. As a broad-based proxy of returns in the overall economy, Fidelity's S&P 500 Index fund increased nearly 81 percent for this period. Compare this to Fidelity's Health Care Providers & Services Sector fund, which is up more than 170 percent and the S&P U.S. Select Health Care Providers Index, which shows an increase of nearly 160 percent for the same five-year period. Analysts attribute this robust performance to a drop in the number of uninsured and a rise in "new customers" for the healthcare business.
Uncertainty remains a constant companion, however, as the ACA shifts into its fifth year. The list of causes are long, including delayed implementation of various provisions, new payment and delivery system reforms, consumer participation in the Exchanges, uncertain state participation in Medicaid expansion, Supreme Court challenges, and the ongoing threat of repeal, all of which are reflected in the market. As The Bond Buyer recently reported, "All three major rating agencies maintain negative outlooks on the non-profit health care sector, warning it faces significant challenges from [the ACA] as well as revenue, volume and reimbursement challenges."
Whether a provider is a non-profit selling bonds or a for-profit enterprise selling securities, Rule 10b-5, promulgated by the U.S. Securities and Exchange Commission, makes it unlawful to make untrue statements regarding a material fact, or to omit to state a material fact necessary in order to make the entity's statements not misleading.
The ACA has been of such significance to the healthcare industry that providers regularly include discussions of the law in their securities documents. And the predominant theme in provider's security disclosures is that they "cannot predict the impact [the ACA] may have on [their] business, results of operations, cash flow, capital resources and liquidity or ... whether [they, as a provider] will be able to modify ... [their] operations to offset any potential adverse consequences from" the ACA. So while the healthcare market suggests the ACA has shown some success in achieving the law's broad aims of increased access, reduced costs, and improved quality, the long-term prognosis remains an uncertain mix. So much so that even providers experience difficulty when describing the ACA's overall impact on their business to investors and bondholders.
A new U.S. Supreme Court decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, while involving kickback issues, is a stark reminder to providers of the validity of this concern. The Supreme Court held in Omnicare that a person can be liable for securities fraud if they omit facts from a disclosure document that would raise serious questions about the validity of their opinions, but a "sincere statement of pure opinion is not an untrue statement of material fact, regardless whether an investor can ultimately prove the belief wrong." Liability can be triggered "if a [disclosure] omits material facts about the [provider's] inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself."
Consequently, providers must carefully evaluate how they describe the ACA's impact on their enterprise in investor and bondholder communications. No small feat given the multitude of variables and market reactions to the ACA as the law celebrates an important milestone anniversary.
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