M&A, debt dampen US healthcare risk profile, report finds


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Dive Brief:

  • Demand for healthcare products and services has helped to keep wind in the sales of U.S. healthcare companies, but continuing deal activity and increasing issuance of high-grade bonds to fund large strategic acquisitions and capital projects is causing credit ratings to trend south, Fitch Ratings reports
  • Regulatory changes, pricing pressures, pushes from activist investors and low interest rates will likely spark more horizontal mergers and acquisitions, as well as vertically integrated deals, according to the ratings agency.
  • “We view M&A and investor appetite for high quality paper, particularly during the late stages of the economic cycle, as major contributors to the risk in investment-grade bond issuance,” Fitch says. “However, prospects of enhanced cash flow generation and greater efficiencies of scale are not fully offsetting increased leverage and this is altering the long-term credit risk profile of the sector.”

Dive Insight:

Other pressures fueling healthcare M&A include technological innovation and consumer-centricity, according to a recent PwC report. The largest deal in the third quarter of 2018 was RCCH Healthcare Partner’s $5.6 billion purchase of LifePoint Health. The quarter also saw HCA Healthcare pick up Mission Health for $1.5 billion.

Overall, though, the quarter marked the fewest number of deals since the first quarter of 2017. Value of deals also declined compared to the same period the previous year.

The slowdown in M&A includes deals among hospitals and health systems. The third period saw just 18 deals, 38% fewer than the 29 in Q3 2017, according to Kaufman Hall. The turndown suggests providers are looking at options other than mergers and acquisitions to achieve strategic aims.

Over the past 10 years, the number of investment grade bonds in healthcare has been growing at an 18% compound annual growth rate, nearly tripling in size to $609 billion by the end of September, according to Fitch. Currently, 58% of those outstanding bonds in the sector have ratings in the BBB category, compared with 1% at the end of 2009.

Roughly half of all outstanding IG bonds in healthcare are held by 10 companies, including CVS Health and Cigna. CVS took out $40 billion in loans to help fund its $67.5 billion purchase of Aetna, resulting in an A/rating watch negative. Cigna issued $20 billion worth of bonds to help cover its $67 billion acquisition of Express Scripts. Cigna’s current credit rating is BBB/RWN.

Fewer than 10% of BBB-rated companies have a BBB/negative rating. Among those are two medtech companies, Becton Dickinson and Bio-Rad Laboratories.

Fitch recently lowered Cardinal Health’s rating BBB+/negative to BBB/stable over concerns of higher than usual leverage following recent deal activity.

Moody’s Investor Services this year revised its outlook for the nonprofit and public hospitals sector from stable to negative. Moody’s warned facilities are “on an unsustainable path” due to high spending and low growth of revenues. 


Will Getting Bigger Make Hospitals Get Better?


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This month, two hospital mega-mergers were announced between Ascension and Providence, two of the nation’s largest hospital groups; and, between CHI and Dignity Health.

In terms of size, the CHI and Dignity combination would create a larger company than McDonald’s or Macy’s in terms of projected $28 bn of revenue. (Use the chart of America’s top systems to do the math).

For context, other hospital stories this week discuss layoffs at Virtua Health System in southern New Jersey. And this week, the New Jersey Hospital Association annual report called the hospital industry the “$23.4 billion economic bedrock” of the state.

Add a third important item to paint the state-of-the-U.S. hospital-industry picture: Moody’s negative ratings outlook for non-profit hospital finances for 2018.

So will getting bigger through merger and consolidation make the hospital business better?

In the wake of the CVS-Aetna plan to join together, the rationale to go big seems rational. Scale matters when it comes to contracting with health insurance plans at the front-end of pricing and financial planning for the CFO’s office, and to managing population health by controlling more of provider elements of care from several lenses: influencing physician care; crafting inpatient hospital care; doing smarter, cheaper supply purchasing; and leaning out overhead budgets for things like marketing and general management.

But the Wall Street Journal warned today the “serious condition” of U.S. hospitals, despite these big system mergers.

Health Populi’s Hot Points: In the past two years, I’ve had the amazing opportunity of speaking about new consumers and patients growing into healthcare payors with leadership from hospitals in over 20 states, some more rural, some more urban, and all in some level of financial crisis mode.

After describing the state of this consumer in health and healthcare, and how she/he got here, I have challenged hospital leadership to think more like marketers with a fierce lens on consumer experience and values. That equal proportions of U.S. consumers trust large retail and digital companies to help them manage their health is a jarring statistic to these hospital executives. The tie-up between CVS and Aetna marries the retail health/healthcare segments and responds to this consumer trust issue.

But then, I remind them that nurses, pharmacists, and doctors are the three most-trusted professions in America.

These three professional clinicians are the human capital that comprise the heart of a hospital in a community.

Hospitals should be mindful that trust is necessary for patient/health engagement. And the trust is with hospitals if the organization chooses to leverage that goodwill for a value-exchange. Hospitals are economic engines in their local communities — often, the largest employer in town. “Everyone” in most communities knows someone who works in a hospital.

And hospital employees spend money in communities, bolstering local employment and tax bases.

Partnering with patients means empathizing with them as both clinical subjects and consumers. For the latter, refer to the sage column from JAMA which recommends that Value-Based Healthcare Means Valuing What Matters to Patients. This means thinking about the value-chain of the patient journey, from keeping people well in their communities through to managing sticker-shock in the financial office. The financial toxicity of healthcare is one risk factor threatening the hospital-patient relationship with the patient-as-payor.

As Mufasa told Simba in The Lion King, “You are more than what you have become. Remember who you are.”



Fitch issues negative outlook for nonprofit hospitals: 4 things to know


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Fitch Ratings’ outlook on the nonprofit healthcare sector is negative for 2018, as the sector faces regulatory, political and competitive challenges.

Here are four things to know about Fitch’s outlook on the sector.

1. Fitch expects nonprofit hospitals and health systems’ profitability to continue to weaken over the next year. “Growth in Medicare and Medicaid volumes are weakening provider payer mixes at a time when providers are moving from volume-based reimbursement in greater numbers,” said Fitch Senior Director Kevin Holloran.

2. Fitch said several factors could adversely affect lower-rated hospitals’ operating performance in 2018, including growing pressure on salaries and continued erosion in payer mix.

3. The proposed tax overhaul bill, which would hamper nonprofit hospitals’ ability to issue tax-exempt revenue, could further pressure the industry, according to Fitch.

4. Although the nonprofit healthcare sector outlook is negative, Fitch maintained its stable outlook for ratings of healthcare issuers. “Fitch anticipates our revised criteria for the acute care sector will be published early next year, which should lead to an above-average, but still balanced, degree of rating movement during the year,” the debt rating agency said.

Outlook Darkens for Not-for-Profit Hospitals


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The revised outlook from Moody’s comes amid a larger-than-expected drop in cash flow this year and the ongoing uncertainty regarding federal healthcare policy for public and not-for-profit hospitals.

Moody’s Investors Service has downgraded from stable to negative its 2018 outlook for the not-for-profit hospital sector based on an expected drop in operating cash flow.

“Operating cash flow declined at a more rapid pace than expected in 2017, and we expect continued contraction of 2%-4% through 2018,” said Eva Bogaty, a Moody’s vice president.

“The cash flow spike from insurance expansion under the Affordable Care Act in 2014 and 2015 has largely worn off, but cash flow has not stabilized as expected because of a low revenue and high expense growth environment,” Bogaty said.

In a briefing released Monday, Moody’s said hospital revenue growth is slowing and is expected to remain slightly above medical inflation, which declined to a low of 1.6% in September. Hospitals can’t translate volume growth into stronger revenue growth because of the lower reimbursement rate increases across all insurance providers and higher expense growth.

In addition, rising exposure to governmental payers will dampen revenue growth for the foreseeable future due to a rapidly aging population and low reimbursement rates. Medicare and Medicaid, represent 60% of gross patient revenue in 2017, Moody’s said.

Key drivers of expense growth include rising labor costs, driven by an acute nursing shortage and ongoing physician and medical specialist hiring. Technology costs are also rising as systems are upgraded and IT staff is needed for training and maintenance. While the ACA’s arrival heralded a drop in bad debt from 2014-16, bad debt rebounded in 2017 and will continue to grow at a rate of 6%-7% in 2018, Bogaty said.

“Rising copays and use of high deductible plans will increase bad debt for both expansion and non-expansion states,” she said.

In the near-term, uncertainty regarding federal healthcare policy will have a marginal fiscal impact on NFP hospitals. Bogaty said ambiguity surrounding the ACA does affect the planning and modelling of long-term strategies, while recent federal tax proposals will add to rising costs for hospitals.

The outlook could be revised to stable if operating cash flow resumes growth of 0%-4%. A change to positive could result from expectations of accelerated operating cash flow growth of more than 4% after inflation, Moody’s said.

Fitch: Failed ACA replacement efforts add to healthcare sector uncertainty


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As ACA repeal and replace efforts stall, significant uncertainty remains surrounding how federal policy will affect nonprofit healthcare organizations, leading to a negative sector outlook for healthcare, according to Fitch Ratings.

The uncertainty and negative outlook comes as the Trump administration looks for ways to weaken the ACA even if the health reform law is not repealed.

Nonprofit hospitals experienced declines in uncompensated care under the ACA because of an increase in healthcare coverage due to Medicaid expansion, rollout of healthcare exchanges and allowing children to stay on their parent’s health insurance plan until age 26.

While repeal efforts cause uncertainty for hospitals, current discussions regarding a bipartisan healthcare bill could be beneficial for nonprofit hospitals. A bipartisan effort could potentially reduce the insurance premium price hikes, according to Fitch.