US Debt-Ceiling Crisis Looms: How Will It Impact Medical Stocks?
The United States is facing a looming debt-ceiling crisis that could have disastrous consequences for the global economy. The debt ceiling, or debt limit, is the total amount the U.S. government is allowed to borrow to finance its expenditure, such as paying salaries and welfare allowances. On Jan 19, the United States hit its debt ceiling limit of $31.4 trillion, leading to a standoff between the White House and Congress over how to raise or suspend the limit, per a Reuters article. A continued impasse related to the debt-ceiling crisis will impact all sectors. The medical companies may face challenges as government healthcare spending may get reduced or halted without a resolution.
Probable Impact of the Crisis
U.S. Treasury Secretary Janet Yellen has warned that the country could default on its debt as early as Jun 1, 2023 if the impasse is not resolved. A default would mean that the United States would fail to pay its creditors, such as foreign governments and investors, who hold U.S. Treasury bonds. This could trigger a financial crisis that would have a ripple effect across the world, impacting markets, trade and currencies. A potential default will also have significant implication for the healthcare industry, with the government focusing more on repaying its debt than healthcare-related spending. The default may also impact Social Security and unemployment insurance benefits, leading to lower or delayed medical expenses by patients.
Factors Causing High Debt
The debt-ceiling crisis is part of an ongoing political debate within Congress about federal government spending and the national debt that the U.S. government accrues. The United States has had large budget deficits for years, meaning that it spends more than it collects in taxes. In fiscal year 2022, the federal government brought in $4.90 trillion but spent $6.27 trillion, with a net budget deficit of $1.38 trillion (the fourth highest of the 21st century).
The main drivers of federal spending are mandatory programs such as Social Security, Medicare, and Medicaid. Other expenses of the government comprise discretionary spending, which also includes defense. A portion of the budget is also spent on paying interest on the debt, which is expected to rise further as debt grows.
Here we discuss three medical stocks that may be potentially impacted by the crisis going forward:
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UnitedHealth Group UNH is the largest health insurer in the United States, serving more than 150 million customers through its various plans, including Medicare and Medicaid. A default may result in a potential disruption in UNH’s revenue stream and cash flow. Shares of UnitedHealth Group have declined 9.6% so far this year.
HCA Healthcare HCA, the largest for-profit hospital operator in the United States, owns and operates 186 hospitals and 121 freestanding surgery centers across 20 states and the United Kingdom. HCA could get delayed payments from Medicare and Medicaid, which account for about 40% of its net revenues in case of a default. Shares of HCA Healthcare have gained 11.6% so far this year.
Pfizer PFE, one of the world's leading pharmaceutical companies, produces and sells a wide range of drugs and vaccines, including the COVID-19 vaccine. A default may affect PFE’s ability to collect payments from government agencies and programs, such as the Department of Defense and the Veterans Health Administration. Shares of Pfizer have lost 22.6% so far this year.
UnitedHealth Group, HCA Healthcare and Pfizer all carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Debt Ceiling History
Per a Reuters article, the United States has raised its debt ceiling 78 times since 1960, usually without much controversy. However, in recent years, some lawmakers have used the debt ceiling as a leverage point to demand spending cuts or policy changes from the opposing party. This resulted in several near-default situations and government shutdowns in 2011, 2013 and 2019.
Current Scenario
In the current impasse, Republicans have proposed cutting spending back to 2022 levels as a precondition to raising the debt ceiling, while Democrats have insisted on a "clean bill" without preconditions, as had been the case in raising the ceiling three times during the Trump administration.
President Joe Biden has urged Congress to act swiftly and responsibly to avoid a default that would harm millions of Americans and damage the country's reputation and creditworthiness. He has also ruled out invoking the 14th Amendment of the Constitution, which some legal scholars argue gives him the authority to bypass Congress and raise the debt limit unilaterally. Biden has said he does not want to create a constitutional crisis over a fiscal one.
As the deadline approaches, both sides are under pressure to reach a compromise or face the consequences of a historic default that could plunge the world into a new recession.
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UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report
Pfizer Inc. (PFE) : Free Stock Analysis Report
HCA Healthcare, Inc. (HCA) : Free Stock Analysis Report