Fitch says 2020 healthcare environment bumpy but negotiable

By | December 1, 2019

Dive Brief:

  • Demand for healthcare services will remain stable next year, but profitability will become more of a challenge, according to a new forecast from Fitch Ratings. The continued move from volume to value is encouraging the evolution of traditional business models, the analysis found.
  • The legal fate of the Affordable Care Act is one of several uncertainties, according to the report. Ongoing opioid litigation is another. And healthcare itself will be an important political issue during the election season.
  • Fitch said that credit downgrades in the sector are likely to outweigh upgrades, but that ongoing discord in Washington means that most companies will be insulated from significant change.

Dive Insight:

The healthcare sector seems to be entering a volatile period, although the chances for a major upheaval are far more remote, according to Fitch Ratings.

The biggest risk to healthcare is currently the uncertainty regarding the ACA, which as it nears its 10th anniversary remains embroiled in litigation, currently awaiting a decision from the U.S. Fifth Circuit Court of Appeals in New Orleans.

Fitch noted that if the law is struck down with no replacement waiting, “it may result in a disorderly wind down of the insurance expansion elements of the legislation, which could have negative ramifications for cash flow and profitability of segments most exposed to patient liabilities.”

While there are legal uncertainties surrounding the ACA, Fitch believes the gridlock in the nation’s capital remains a plus for the sector, noting that “progress on major pieces of healthcare legislation, due to political discord in Washington, will insulate issuers from the effects of any new policy measures on profitability during 2020.”

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Meanwhile, those companies caught up in litigation over the opioid crisis will likely have to negotiate years of lawsuits, but Fitch believes it will be manageable over the long-term. “We expect investment-grade issuers to navigate the litigation with credit profiles intact, given the ability to redirect a portion of cash flow from operations from shareholder returns to litigation payments,” the rating firm noted. “Moreover, early indications are issuers will pay cash settlements over a period of years rather than in lump sums, which limits the effect on credit metrics.”

Healthcare ventures are also navigating the shift from volume to value. “A slow changing payment environment tying profits to high value, rather than high volume care, will continue to encourage gradual evolution of business models across the sector,” Fitch observed. “The convergence of business models via strategic M&A is viewed as constructive to credit profiles since it could help companies align value propositions with shifting consumer and payer preferences, despite its potential to reshape issuers’ balance sheets.”

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