Fitch Ratings predicted that disruptions in healthcare could affect credit profiles of healthcare companies in 2018.
Disruptions from within and from Washington and outside businesses are predicted to be the main drivers for such activity.
Despite the possible disruptions, Fitch offered a “stable” overall outlook for 2018.
Fitch said alternative payment models, the future of the Affordable Care Act (ACA), tax reform legislation and “outsider disruption to business models,” namely Amazon’s potential entrance into healthcare, may cause disruption and threaten pricing power next year.
The rating analysts also said healthcare’s “rapid improvements in technology” are creating disruptions. Companies within healthcare are reshaping the landscape and outside forces “could seek to exploit inefficiencies that contribute to the high cost of U.S. healthcare.”
Fitch said outside disruptions aren't widespread in healthcare yet because of the system’s complexities. For outside forces to enter healthcare, they would need significant capital and strategic expertise. Amazon and Apple, two tech companies, have plenty of both. Technology is causing decentralization in healthcare and moving patients away from hospitals and other “brick and mortar settings.” Also, data and analytics are allowing for more consumerism and price transparency, said Fitch.
Despite those concerns, Fitch said the healthcare sector’s outlook is stable “because of durable tailwinds to organic demand, generally consistent issuer fundamentals, such as leverage and coverage, and an overall healthy liquidity profile with most companies producing reliable [free cash flow].”
That said, Fitch predicted that rating downgrades will likely outweigh upgrades for healthcare companies next year. Currently, 73% of ratings are stable, 18% negative, 4% positive and 5% have no outlook.
“The outlook mix reflects challenges to business models, particularly for healthcare providers focused on inpatient services, generic pharmaceutical manufacturers and certain competitors in the distribution and pharmacy benefits manager space. Issuers with stable outlooks in those segments have relatively defensible operating profiles and good headroom in rating sensitivities,” said Fitch Ratings.
Fitch’s report was the second in as many months that warned about possible issues with healthcare companies. Last month, Fitch said politicized federal and state regulations are the biggest threat to for-profit hospitals. The regulations have created an “unpredictable operating environment.”
On the other hand, in August, Fitch Ratings reported that CMS’ plan to cancel or scale back bundled payment programs could create “short-term positives” for some areas of healthcare. At that time, Fitch Ratings said CMS' move away from bundled payments will result in general acute care and skilled nursing facilities receiving a “reprieve from one of their operating headwinds.” Fitch also predicted ambulatory surgery centers will see volume growth, while general acute hospitals will lose volume.