Fitch: Weak Volume Trends Present Operating Challenges in For-Profit
NEW YORK -- June 27, 2013
Link to Fitch Ratings' Report: Hospitals - Credit Diagnosis (Weak Volume Trend
Possible Evidence of Systemic Shifts in Care Delivery)
Persistent weakness in patient volume growth despite an improving economy in
most areas of the country is compelling evidence that hospital companies are
experiencing systemic shifts in care delivery, according to a new Fitch
Even accounting for a noisy calendar, a persistently weak trend in organic
volume growth was evident across the for-profit hospital sector in
first-quarter 2013. Same-hospital admissions dropped 3.8% on average for the
Fitch-rated group of companies while same-hospital adjusted admissions dropped
Aside from the weak economy, healthcare utilization patterns are likely being
influenced by an evolution in patient behavior encouraged by the growth of
insurance products with higher patient responsibility for medical costs. At
the same time, a shift away from strictly volume-based pricing schemes and
toward value-based care continues to influence hospitals.
Assuming a continued evolution in the industry toward value-based care,
hospitals may find it harder to manage the effects of weak volumes from the
topline down, such as through acquisitions or expansion of outpatient
capabilities. Rather, there will have to be a bottom-up plan to preserve
profitability and hospital management will need to be aggressive in managing
the cost of an episode of care.
Some recent industry trends, including vertical consolidation, increased
collaboration with post-acute care providers and more direct alignment of
physician incentives through increasing rates of employment, are evidence of
the strategies hospital management has been employing to manage the shifting
Credit profiles are presently solid relative to ratings in the for-profit
hospital sector, indicating that companies have adequate financial flexibility
to manage within the context of the weak organic operating trends. However,
there are other areas of concern that when compounded by weak operating trends
could pressure credit protection measures in future periods. These include
regulatory scrutiny, higher debt levels to fund acquisitions and the potential
for increased interest expense burdens in a higher rate environment.
An active acquisition environment has been supportive of topline growth in the
industry, although recent transactions have been small and primarily
cash-funded. The strategic rationale for consolidation in the industry is
encouraged by reforms favoring larger, integrated systems of care delivery,
including the Affordable Care Act. Indicating a possible resurgence of larger
M&A in the industry, Tenet Healthcare Corp. (Fitch IDR 'B' on Rating Watch
Negative) announced this week that the company plans to acquire Vanguard
Health Systems for a total consideration of $4.3 billion.
Fitch believes the acquisition is strategically sound because it will enhance
the geographic scope of the Tenet's portfolio of care delivery assets and add
operational diversification through Vanguard's health plan operations. The
Negative Watch primarily reflects risks inherent in the companies' operating
profiles, the most important of which is strained FCF generation and
The full report, 'Hospitals' Credit Diagnosis: Weak Volume Trend Possible
Evidence of Systemic Shifts in Care Delivery,' is available at
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Fitch Places Tenet Healthcare Corp.'s Ratings on Negative Watch' June 24,
--'The Affordable Care Act and Healthcare Providers: Assessing the Potential
Impact', May 1, 2013
--'Fitch's 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
Applicable Criteria and Related Research:
The Affordable Care Act and Healthcare Providers (Assessing the Potential
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.
Corporate Rating Methodology
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