In a new report on the healthcare and pharmaceuticals sector, Fitch Ratings said providers are facing headwinds across the spectrum from outpatient to post-acute care.
Mirroring another recent Fitch report, the ratings company said these issues are being caused by regulatory uncertainties, which “will have ramifications across the industry with healthcare providers the most obviously exposed.”
Other challenges for providers are growing consumerism, payer consolidation and a move from fee-for-service (FFS) to value-based payments, said Fitch.
Fitch Ratings tackled a number of issues in its report: providers, pharmaceuticals, drug supply chain and the general healthcare industry. Fitch said there are multiple factors leading to lower patient volumes, especially inpatient admissions, including payer and patient preference for lower cost outpatient settings, Medicare payment changes to reduce hospital readmissions and more competition from outpatient providers.
Acute care hospital companies have responded to these changes by investing in outpatient services. The strategy allows health systems to defend market share. Fitch said investing in outpatient assets is generally positive for the system’s credit profiles, but warned that focusing more on outpatient leads to “more economic cyclicality and seasonality in patient volumes for hospital companies.”
Concerning CMS canceling or delaying Medicare alternative payment models, Fitch Ratings said CMS’ move shows that federal policy continues to drive providers. Fitch added that rolling back the bundled payment programs for certain total joint replacement and cardiac patients will reduce "regulatory and financial burdens."
So, while ending or delaying the bundled payment programs could create “short-term positives” for some areas of healthcare, Fitch believes in the longer run “financial constraints and demographic-driven demand will be powerful motivators to shift care to the lower cost settings of providers with the financial resources to risk-share and coordinate with operators in other settings.”
In addition to providing an outlook on the provider side, another issue mentioned in Fitch’s report dealt with Amazon potentially entering the healthcare sector. Fitch said Amazon exploring a move into healthcare is understandable and likely. If Amazon moves into healthcare, Fitch predicted “the effect would be pronounced but not the category killer it has been in retail.” The retail market is more fragmented than healthcare and competition within healthcare distribution is already high.
Fitch also offered its opinion on another piece being closely watched in healthcare — CVS’ proposed acquisition of Aetna. The deal may improve the “company’s strategic position.” Combining CVS and Aetna, which is the third-largest health insurer by covered lives, would create a company similar in size to UnitedHealth Group, the largest payer. UnitedHealth has Optum, a pharmacy benefit manager (PBM) and healthcare analytics subsidiary, but does not have CVS’ retail footprint of almost 10,000 retail pharmacy locations.
“The CVS-Aetna combo could be seen as another shot across the bow for the stand-alone PBM business model, which has recently been beleaguered over a lack of transparency in how the industry earns margin, which partly relies on pharmaceutical manufacturer rebates. However, we do not think that the integrated PBM business model used by UnitedHealth, and now potentially a merged CVS and Aetna, resolves this inherent weakness and perhaps even exacerbates the rebate model’s opacity,” Fitch said.