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Fitch: Economic Pressure & Event Risk Drives Health's Negatives

Source: Fitch

Posted on 02 Dec 2009

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Fitch Ratings' 2010 outlook for the U.S. healthcare sector remains negative. Persistently high unemployment with its impact on health insurance coverage along with consumers' lessened ability to manage out-of-pocket costs of co-payments and co-insurance will continue to hamper prospects for the industry, in general, in 2010. Growing event risk surrounding U.S. healthcare reform and that impact on health insurance coverage, reimbursement and the corresponding change in the competitive landscape all create uncertainty regarding long-term financial results for the sector.

While there have been some signs of improvement in the economy, high unemployment is expected to continue well into 2010. This is particularly troublesome due to its ongoing impact on insurance coverage and people's ability to manage out-of-pocket expenses for healthcare. Therefore, people will continue to focus on reducing healthcare expenses and delaying non-essential care. While this focus will pressure top-line growth, EBITDA is expected to remain stable due to on-going cost containment and continued operational restructuring of companies. Additionally, flexibility in capital expenditure along with stable EBITDA should result in sustained levels of free cash flow in 2010. Fitch expects many industry participants to continue to be aggressive in returning capital to equity shareholders through dividends and share buybacks.

Congress continues to work on crafting healthcare reform legislation. While a bill has been approved in the House of Representatives, the Senate has not voted on its own version. Consequently, it is unclear what the ultimate impact will be for the industry from this initiative. However, key issues surrounding the reform relate to coverage, reimbursement and changes in the industry competitive environment. In relation to insurance coverage, if the reform achieves its goal of increased insurance coverage, this will be a positive for the industry. Fitch believes that in part, to pay for the insurance coverage expansion, industry participants will see declining profitability margins as a result of reimbursement declines.

Reimbursement pressure could come from Medicare reductions, another public payer or other restrictions associated with the reform. Key to overall profitability will be whether the coverage expansion offsets margin erosion in a timely manner to maintain profit levels. Finally, the most difficult part of reform to evaluate will be its effect on the competitive environment of the industry. New restrictions could permanently change prospects for certain areas of the industry and result in changes in business strategies. These strategy changes could lead to increases in merger and acquisition activity in an attempt to improve prospects through broadening product or service portfolios and increasing efficiency with scale. With the potential for increased acquisition and merger activity comes the expectation for increased debt issuance that could lead to higher leverage at least in the near term.