Fitch: ACA and Weak Utilization Reinforce Consolidation Trend in U.S.
Healthcare Provider Industry
NEW YORK -- May 1, 2013
The ongoing implementation of the Affordable Care Act (ACA) is unlikely to
result in a major departure from current capital structure management and cash
deployment priorities for U.S. healthcare providers, according to a new Fitch
Ratings report. The top priority for cash deployment by these companies has
recently been acquisitions and the ACA reinforces the trends that are
encouraging industry consolidation.
Fitch does not expect most segments of the healthcare provider industry to
benefit from a sustained uplift in growth of organic patient volumes because
of the ACA, with a possible exception being outpatient services. Over the past
several years, a seemingly durable trend of slowing growth in U.S. healthcare
utilization and spending has developed, which is not entirely explained by the
weak macro-economic conditions.
Slowing growth is most recently evidenced by the poor first quarter 2013
(1Q'13) volume trends reported by large hospital chains. While Fitch thinks
that the health insurance expansion elements of the ACA might provide a
temporary boost to utilization, it will not be a panacea for slowing growth.
Higher patient volumes generally have positive financial implications for
healthcare providers. This stems from the currently dominant fee-for-service
payment system, coupled with the high degree of operating leverage in most
healthcare providers' cost structures. Without an obvious catalyst for a
recovery in weak organic growth, healthcare providers must instead look for a
bottom-up solution to offset the effects on financial results.
A trend of industry consolidation is reflective of the fact that economies of
scale and vertical consolidation will support profitability in an environment
where healthcare providers face slow organic growth and are required to accept
more financial risk, such as through bundled or value-based payments.
Providers that are successful under a value-based payment system will need to
effectively manage the cost of an episode of care by directing patients to the
lowest cost care delivery setting and aligning physician focus on providing
high value healthcare.
While a broad change in the current fee for service payment scheme for
healthcare providers will require a gradual evolution, the ACA influences the
Medicare payment scheme in this direction through a host of payment reforms
that emphasize value and cost control.
The full report, 'The Affordable Care Act and Healthcare Providers: Assessing
the Potential Impacts,' is available at 'www.fitchratings.com.' The report
examines the potential effects of three important components of the ACA,
including the expansion of state Medicaid programs, the implementation of
health insurance exchanges and Medicare payment reforms, on six sub-segments
of the for-profit healthcare provider industry.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Hospitals Credit Diagnosis', April 4, 2013;
--'High-Yield Healthcare Checkup', Jan. 30, 2013;
--'2013 Outlook: U.S. Healthcare', Nov. 29, 2012;
--'U.S. Leveraged Finance Spotlight Series - Community Health Systems, Inc.',
Oct. 1, 2012;
--'U.S. Leveraged Finance Spotlight Series - HCA, Inc.', Oct. 24, 2012;
--'Corporate Rating Methodology', Aug. 8, 2012;
--'For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting
Policies and Practices', June 21, 2012;
--'For-Profit Hospital Insights: Electronic Health Record Incentive Payments',
March 7, 2012.
Applicable Criteria and Related Research The Affordable Care Act and
Healthcare Providers (Assessing the Potential Impact)
High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S.
2013 Outlook: U.S. Healthcare -- Navigating a Dynamic Operating and Regulatory
U.S. Leveraged Finance Spotlight Series Community Health Systems, Inc.
U.S. Leveraged Finance Spotlight Series: HCA Holdings, Inc.
Corporate Rating Methodology
For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting
Policies and Practices
For-Profit Hospital Insights: Electronic Health Record Incentive Payments
Hospitals Credit Diagnosis (Implications of the ACA Slowly Taking Shape)
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Megan Neuburger, +1 212-908-0501
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Jacob Bostwick, CPA, +1 312-368-3169
Brian Bertsch, +1 212-908-0549
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