According to a new report issued by Fitch Ratings, the U.S. healthcare sector experienced an eventful but stable 2010 as the Patient Protection and Affordable Care Act was enacted and implementation of certain provisions of the bill took effect.
According to the report, macroeconomic conditions remain weak and top-line pressures persist, but financial flexibility stemming from strong liquidity profiles and aided by management cost-cutting efforts and low cost inflation supported ratings in 2010. Overall, Fitch expects similar trends in credit profiles in 2011, with credit metrics trending near 2010 levels.
Barring an accelerated macroeconomic recovery, Fitch does not foresee improvement in the healthcare industry's organic volume and pricing trends in 2011. This is despite easy comparisons against weak 2010 performance, which will help most sub-sectors. Since cost inflation is not presently a major headwind for the industry, operating margins should hold up well. Concerning trends indicating higher levels of structural unemployment, as well as growth in the consumer share of healthcare spending (such as through high deductible health plans), support an expectation of weak organic trends over the longer term. These trends could eventually contribute to margin erosion.
The looming branded drug patent cliff will exacerbate the impact of weak top-line organic growth for the pharmaceutical sector. Although the bulk of 2011 patent expiries do not occur until the fourth quarter, several branded drug makers are set to lose large chunks of revenues and profits. Conversely, the patent cliff affords much of the rest of the channel the potential for improved profitability, especially drug distributors, PBMs, and generic drug firms.
Fitch expects liquidity to remain strong as many issuers took advantage of favorable rates to refinance existing debt in 2010, have ample cash balances, and generate solid levels of FCF. Acquisition activity is expected to be robust in 2011 as issuers deploy flush liquidity to bolster weak organic growth, especially in light of generally attractive asset valuations. The pipeline of potential acquisition targets is deep, particularly in the for-profit hospital sector, where ongoing dislocation in the tax-exempt debt markets in contributing to attractive asset valuations on not-for-profit and municipal hospitals.
Despite the ongoing legal and political challenges to the PPACA, Fitch expects implementation of the legislation to progress generally on schedule in 2011. Among the various sub-sectors, the pharmaceutical and healthcare provider industries will be the most directly impacted in the near term, through industry fees and various reforms to the government payer reimbursement structure. Fitch does not expect healthcare reform to directly impact ratings in 2011; however, regulatory risk related to the PPACA will likely remain at the forefront throughout the year.