Medicaid Cuts Threaten Healthcare: Time to Short the Vulnerable, Buy the Resilient

The GOP tax plan’s Medicaid funding cuts, set to take effect by mid-2025, pose a seismic threat to the healthcare sector. For hospitals in Medicaid-expansion states like California and New York, insurers exposed to enrollment volatility, and states facing fiscal strain, the stakes are existential. This is a sector-wide reckoning—one that demands immediate action for investors. Below, we dissect the risks and opportunities, advocating a short position on hospital REITs and regional healthcare stocks, while highlighting managed care firms and state bond spreads as asymmetric plays.

Hospitals in Expansion States: Revenue Collapse Ahead

The Medicaid provisions—work requirements, enrollment restrictions, and funding shifts—are a direct threat to hospitals reliant on federal reimbursements. For states like California and New York, which expanded Medicaid under the ACA, the GOP plan’s matching rate reductions and eligibility crackdowns could slash revenue by billions.

Take California:

The state stands to lose $27.45 billion in federal funding by 2034 if it maintains its current programs, forcing a 100% increase in state spending. Hospitals in Los Angeles, San Francisco, and other urban centers, where Medicaid covers 40–50% of patients, face a revenue freefall as enrollment plummets. Similar dynamics apply in New York, where Medicaid expansion accounts for 24% of total hospital revenue.

Regional healthcare stocks and hospital REITs like HCN (Hospital Corporation of America) and HRC (HCP Inc.)—which own facilities in expansion states—are prime candidates for shorting. Their reliance on Medicaid-funded patient volumes makes them vulnerable to the 8.6 million projected coverage losses by 2035.

Insurers: Premium Volatility and Enrollment Shifts

The GOP plan’s Medicaid cuts create a premium pricing nightmare for insurers. As millions lose coverage, demand for private plans on ACA exchanges will surge—if subsidies remain in place. However, the GOP’s simultaneous expiration of enhanced ACA subsidies in 2026 risks leaving lower-income individuals in a “coverage gap,” unable to afford premiums.

Here’s the opportunity: managed care firms like CNC (Centene) and UNH (UnitedHealth Group) could profit from the chaos. These companies are already scaling up enrollment in state Medicaid programs and private markets. Their risk-adjusted pricing models and administrative efficiency make them well-positioned to capture the shifting patient pool.

State Fiscal Exposure: Credit Risks and Bond Spreads

States like California and New York face a fiscal crossroads. To offset federal Medicaid cuts, they must choose between:
1. Raising taxes (unpopular and politically risky),
2. Cutting other programs (e.g., education, infrastructure), or
3. Borrowing to fund Medicaid gaps (expanding debt).

The result? Credit downgrades and widening bond spreads. California’s debt, already rated AA+, could see pressure as its Medicaid costs balloon. Investors should short state bonds with high Medicaid exposure and long credit default swaps on these issuers. Conversely, long positions in managed care firms offer a hedge against enrollment-driven revenue growth.

The Inevitable Outcome: Position for the Unavoidable

The GOP’s Medicaid cuts are not a hypothetical—they’re baked into the reconciliation bill’s timeline. With the debt ceiling deadline looming, passage by mid-2025 is all but certain. The sector’s vulnerabilities are clear:
- Short hospital REITs and regional healthcare stocks (e.g., HCN, MOH) as revenue dries up.
- Go long on managed care firms (CNC, UNH) and state bond spreads as fiscal pressures intensify.

The healthcare sector is at a pivotal inflection point. Investors who act now—hedging against Medicaid’s unraveling—will capture the asymmetric upside of this structural shift.

Final Call to Action: The Medicaid cuts are a done deal. Position your portfolio for the fallout—before the uninsured rates soar and state budgets buckle.