Fitch Ratings’ sixth edition of The Checkup, a look at 20 of the largest issuers of high-yield debt in healthcare, predicts organic revenue growth at 3% to 4% for most of the healthcare providers, specialty pharmaceuticals and medical device and diagnostic companies it profiled.
The report forecasts that median operating margins will continue to thin as customer consolidation, healthcare consumerism and regulation constrain the industry's “ability to increase pricing, and cost-cutting will not provide a sufficient offset.”
The report differentiates among healthcare sectors, seeing providers and drugmakers facing the most regulatory and structural reform risks. Medtech and devices, IT and diagnostics fall at the lower end of the spectrum.
The Checkup analyzed the business profiles and capital structures of 20 highly-leveraged healthcare companies, including large health systems Community Health Systems, HCA Healthcare, Tenet Healthcare and Universal Health Services. The 20 companies had an aggregate $178 billion of outstanding debt.
The report found the companies best positioned to find success have “innovative new products or breadth of offerings.” Most of the companies examined have “compelling value propositions and relatively low risk of secular obsolescence,” according to the report.
That said, M&A activity remains an important factor that can adjust business models and cause disruption.
Only five of the 20 companies have negative rating outlooks: Endo, Mallinckrodt, Owens & Minor, Quorum, and Teva. Those negative outlooks are connected to “operational challenges,” Fitch said.
Divestiture and operational improvement programs are on tap for some of the companies in the report. That includes CHS, which continues to shed debt.
Looking at the next one to two years for major health systems, Fitch said:
- CHS’ leverage will be flat between 2018 and 2021. The report expects divestitures will not change leverage if CHS applies proceeds to pay down debt.
- HCA’s discretionary free cash flow will go to share repurchases and acquisitions. HCA will refinance debt that’s coming due.
- Tenet’s leverage will decline slightly in 2018-2019 as free cash flow goes to a joint venture rather than reducing debt.
- UHS, one of only two companies in the report with large maturities left to address in 2018, has a strong financial profile, ample liquidity and strong operating margins. Fitch expects CHS to continue “having a strong competitive position and market leading access to capital offset by higher leverage.”
Of course, these projections could change depending on M&A activity and outside forces, including the payer market and regulatory changes.
Hospitals are closely watching news from Washington. Though Republicans were unable to repeal the Affordable Care Act, the Trump administration continues to take aim at the law. Weakening the ACA further would likely result in hospitals feeling the brunt of fewer people insured and more uncompensated care.
However, even without changes to the healthcare law, health systems, including major hospital operators, can expect continued tight operating margins for the foreseeable future.