Fitch sees stable 2019 for US healthcare despite financial pressures

By | December 1, 2018

Dive Brief:

  • Profitability in the U.S. healthcare industry could be elusive for some players in the coming year, but the overall outlook is stable, according to a new Fitch Ratings report.
  • Issuer fundamentals, including leverage and coverage ratios, will be neutral for 2019, while creation of cash flow should trend positive. Healthcare pricing and profit margins will continue to face pressures, but Fitch expects liquidity to be manageable. 
  • The credit rating agencies predicts this year’s two-to-one ratio of downgrades to upgrades will carry over into next year.

Dive Insight:

The report points to four trends that could impact healthcare in 2019: regulatory efforts to rein in rising pharmaceutical prices, debate around access to care and affordability, lawsuits claiming industry culpability in the opioid crisis and effect of large vertical mergers of providers, payers and pharmacy benefit managers.

“Most disruptive threats to healthcare business models boil down to an attack on pricing power, including outside industry competitive upstarts, government price setting and consumer and employer efforts to force lower pricing,” Megan Neuburger, managing director of Fitch Ratings, said in a statement. “Of all of these, the government policy aspect poses the greatest threat since it is the farthest reaching. That said, we think that radical changes to the current system are unlikely.”

The forecast comes as CVS and Aetna finalized their $ 78 billion megamerger this week, creating a retail pharmacy and health insurance combo with annual revenue of more than $ 245 billion — second only to Walmart.

The report echoes previous reports citing continued pressures on hospitals as they face smaller volumes, rising costs and lower federal reimbursements. A Fitch report on the financial soundness of nonprofit hospitals and health systems in the third quarter of 2018 showed a mixed bag, with 11 security ratings upgrades and 11 downgrades. 

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Third quarter earnings reflected the strain. Quorum Health saw net operating revenue fall 7.7% year over year to $ 460.5 million and had $ 9.3 million in losses due to lower volumes. Community Health Systems also reported a drop in operating revenues for the quarter — down 5.9% to $ 3.5 billion. 

By contrast, insurance giant UnitedHealth Group tallied 12% increases in both revenues and earnings from operations in Q3 compared with the prior year, finishing the period with $ 56.6 billion in revenues and $ 4.6 billion in operations-related earnings. The company benefited from enrollee growth in Medicare Advantage plans, Medicare supplemental plans, risk-based commercial plans, individual plans and international customers, as well as growth in its Optum division.

Top image credit: Getty Images

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