S&P Health Care: Trends, Overview and Outlook For-Profit Health Care Health Care Insurance Ratings Not-For-Profit Health Care

Transcription

1 S&P Health Care: Trends, Overview and Outlook For-Profit Health Care Health Care Insurance Ratings Not-For-Profit Health Care Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor s. Copyright 2013 by Standard & Poor s Financial Services LLC. All rights reserved.

2 Speakers Moderator Lucy Patricola Senior Director For-Profit Health Care Panelists Kevin Holloran Senior Director Not-For-Profit Health Care David A. Kaplan Director For-Profit Health Care Joseph Marinucci Senior Director Health Care Insurance 2

3 Health Care Hot Topics Page To find a copy of slides, articles, and watch videos the team has produced, please visit: 3

4 Healthcare Industry Landscape Government $$$ Federal & State Governments Employers Users (out of pocket) Underwriting Administrative & Customer Service Marketing Exchanges Privately managed government programs Insurance Companies Service Providers Products Not-for-profit hospitals & health systems For-profit service providers Pharmaceuticals Medical Devices Acute Care Hospitals Acute Care Hospitals Branded Cardiovascular Health Systems Nursing/Assisted Living Home-based Health Hospice Behavioral Health Specialty Pharmaceuticals Generic Biotech/Biosimilars Orthopedic Surgical equipment Monitors Infusion Rehab Ambulatory Surgical Centers Dialysis Centers Medical Supplies/ Consumables Others Laboratory & Diagnostic Services Distributors Contract Research & Manufacturing Life Science Co s 4

5 Agenda Individual Sector Profiles Discussion of Common Themes Comparative Statistics 5

6 Sector Profiles

7 Not-For-Profit Stable outlooks will continue to dominate, although we believe the sector is at a tipping point Positive factors are helping to cushion incremental rating pressures, for now On-going uncertainty and long-term credit risks for the sector abound We believe that the operating environment will be increasingly negative Weaker revenue environment Renewed competition for patients Transition risk issues Cost savings harder to find Capital pressures building again Investment in IT, physicians and integration continue 7

8 For-Profit We expect credit quality to be stable to slightly negative in certain subsectors and tangibly negative in others To date in 2014, our upgrade/downgrade ratio (of 1:3) is more negative than the broader group of corporate ratings Credit quality is being negatively affected by Negative reimbursement trends Higher leverage stemming from M&A / consolidation across many subsectors (despite increased scale and diversification) Dividend-driven refinancing at speculative-grade companies Aggressive financial policies tolerated by investors seeking yield. The majority of for-profit healthcare companies have low speculative grade ratings. 8

9 Health Insurance Stable outlooks predominate among our rated Health Insurers Strong credit quality reflects capacity to withstand a period of moderate strain Business conditions still considered favorable Industry risk remains somewhat elevated (fuller ACA roll-out) The sector is adapting to an evolving law that is reliant upon a sustainable private sector framework Broader concerns include growth management in the government-sponsored product lines & the potential for greater than expected upside claim pressure tied to increased demand Pace of M&A has recently slowed with pick-up expected for

10 Four Common Themes We have identified four common themes that are affecting S&P Health care: ACA (Medicaid Expansion/ Exchanges) Health Care Reform Declining Utilization Mergers and Acquisitions 10

11 Affordable Care Act

12 Affordable Care Act We see a growing influence from the Affordable Care Act on the S&P Health Care Sectors Why the impact is less pronounced than headlines suggested The ACA is driving M&A activity in certain subsectors (i.e. medical devices), contributing to an indirect impact on ratings Health care reform is evolving slowly Uncertainty about implementation (e.g. healthcare.gov; legal rulings) Recent lower than expected utilization has allowed health insurers to strengthen their balance sheets Mixed and evolving concerns about narrow networks 12

13 Affordable Care Act: Not-For-Profit Movement towards health reform and the Affordable Care Act is contributing to a more negative environment for providers Limited direct rating impact to date, balance sheets remain strong however, tighter margins are beginning to emerge How do we make it on Medicare rates? Cost containment has helped provider profitability it is sustainable? Exchanges could drive weaker commercial reimbursement to date marginal impact and not as dramatic as originally anticipated Contributor to declining utilization (value/quality based payments) although offset by Medicaid growth 13

14 Affordable Care Act: For-Profit We see the bite, in specific post-acute subsectors (Nursing, LTACs) For acute-care hospitals it s Dessert before vegetables The near term results are favorable, with the reduction in uncompensated care flowing straight to profitability BUT.. the reduction in hospital subsidies are only delayed temporarily We see behavioral health as a beneficiary The impact has been limited for pharmaceuticals, medical devices, and labs, so far 14

15 Affordable Care Act: Insurance In 2014, the ACA by itself has not resulted in any rating actions, a trend that we expect to persist through 2015 The Blues have emerged as major players as expected Established insurers have come into the marketplace with balance sheet strength and ability to withstand a period of moderate stress The large national insurers have mostly been cautious but are expected to increase focus in 2015 Concern remains for upside claims pressure into 2015 (timing). 15

16 Medicaid Expansion/Exchanges

17 Medicaid Expansion/Exchanges Early indications are good, but the impact remains uncertain ACA driven coverage expansion has provided a small boost in revenues for some hospital companies and bolstered revenue for insurers Uninsured to insured is good for the population/providers Cases from the exchanges are higher-acuity than the average case Early success of public exchanges We believe the trend will continue into 2015 as exchanges mature and more states potentially expand Medicaid (Pennsylvania) Despite positive momentum, the relative impact has only been incremental 17 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

18 Medicaid Expansion/Exchanges: Not for Profit Generally favorable developments, but too soon to declare victory Initial drop in uninsured Do newly insured utilize the system at a greater rate and is this catch-up or different cohort? Employers pushing health costs to employees Higher deductible plans becoming more prevalent The effort to address quality and utilization In patient use rates are sharply down 18 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

19 Medicaid Expansion/Exchanges: For Profit Favorable in the near term for Acute care hospitals Many hospitals experiencing near-term reduction in uncompensated care stemming from medicaid expansion and expanded coverage from exchange based policies. Reductions in subsidies to hospitals are delayed but still to come in near term Reimbursement pressures is a long term trend and comes in various forms, including Readmission penalties two-midnight rule Shortening length of stay Site neutral payments and narrower eligibility criteria for LTAC 19 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

20 Medicaid Expansion / Exchanges: Insurance 27 states and D.C. have expanded Medicaid Expanded eligibility to 138% of FPL Federal Govt. footing 100% of cost for first 3 years; then at 90% Near term potential for uptake in IN and UT Increased enrollment means organic growth opportunity for insurers CBO projections (MCaid - 11 million, HIX - 13 million for 2015 'Woodwork effect impacting expansion and non-expansion states Ongoing caution about morbidity of newly insured 20 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

21 Health Care Reform

22 Health Reform Bending of the price curve starting to become apparent Reform impact getting sharper: starting to drive ratings and outlooks Pace is picking up Profitability pressure will continue to grow Providers are increasing efficiency We believe value-based pricing and price transparency will emerge as key factors but are slow to emerge At risk: high cost procedures and providers Does high quality justify the cost? 22 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

23 Health Reform: Not-For-Profit Providers have prepared for national health reform by cutting costs, strengthening balance sheets, enhancing infrastructure, and aligning with strategic partners this continues Initial focus has been on the insurance mandate New payment models are not yet broadly applicable or measurable and are slowly emerging Uncertainty about pace and depth of impact remains 23 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

24 Health Reform: For-Profit Service providers are the most expensive element of the healthcare system and the prime target for continued initiatives to lower both costs and utilization. Longer term tailwinds including aging population are offset by reform across public and private payers as trajectory of healthcare costs is acknowledged as unsustainable Medical device companies Price transparency is a big exposure that could change the rating landscape for Medical devices Pharmaceutical prices for branded pharma will likely continue rising Growth in specialty drug costs could become a bigger issue for payers Generics continue to increase as a proportion of prescriptions 24 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

25 Health Reform: Insurance Focus on migration to value-based reimbursement Sharing data with consumers to support decision making Emphasizing price transparency to facilitate comparison shopping / value assessment Serving as a mechanism for collaboration Credit impact - very modest for insurers 25 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

26 Declining Utilization

27 Declining Utilization Medicaid expansion could interrupt this trend over the near-term Utilization will decline over the long-term due to: Higher deductible plans and growing coinsurance Effort to address quality and utilization Big debate as to why We are forecasting higher competition in the provider space Leading to sluggish growth rates in the provider space and pressure on financial metrics 27 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

28 Declining Utilization: Not-For-Profit Significant movement from inpatient utilization to shorter observation stays and ambulatory settings Greater use of pharmacology treatments as substitute for procedures Shift of health care costs to patients in the form of higher copays, deductibles and coinsurance Deferred care due in part to growth in high deductible plans Greater focus on quality and quality metrics leading to reduced utilization 28 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

29 Declining Utilization: For-Profit Organic growth No better than GDP Ratings incorporate our weaker forward-looking expectations Affecting all areas except branded pharmaceuticals and companies with strong pipelines of new products Providers: Still soft, offset by early positives from the ACA/exchanges. Equipment companies: Hospitals concerned about margins are extending replacement cycles for capital equipment Product distributors: Minimal growth expected in 2014 Surgery centers: Low single-digit growth 29 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

30 Declining Utilization: Insurance ACA and Medicaid expansion may interrupt this trend with upside bias in the short-term Long-term, utilization is likely to decline due to: Cyclical - relative influence of the economic environment Structural - products, care coordination, practice protocols 30 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

31 Mergers & Acquisitions

32 Mergers & Acquisitions We expect continued M&A activity across the three S&P health care sectors M&A activity is offsetting some of the negative bias, particularly with providers The investor market encourages M&A and tolerates higher leverage 32 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

33 Mergers & Acquisitions: Not-For-Profit Merger and acquisition activity is expected to continue Like for-profit providers, the need to build scale and increase covered lives in preparation for new reimbursement models Health plan and hospital mergers and acquisitions Growth in participation and affiliation strategies in lieu of M&A 33 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

34 Mergers & Acquisitions: For-Profit The pace of consolidation has been increasing Several very-large debt-funded acquisitions in process Specialty pharma subsector is particularly active Inversions aiding this trend in order to access trapped cash and to lower U.S. tax rates Primary reasons for the surge in acquisitions: Economies/efficiencies of scale, including cost and revenue synergies Strong market share as a competitive advantage Increased strength & diversity to offset uncertain industry environment Increase shareholder value though debt-financed growth Avoid being acquired by competitors Absence of organic growth opportunities Low interest rates & unproductive idle cash 34 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

35 Mergers & Acquisitions: Insurance Deal pace slowed significantly leading up to and into the core provisions of ACA implementation Expectation for trend to reemerge in 2015: Relative maturity of the commercial marketplace Growing emphasis on scale and diversity Deepening segment focus, enhance medical management 35 1 ACA (Medicaid Expansion/ Exchanges) Health Care Declining Reform Utilization Mergers and Acquisitions

36 Comparative Statistics

37 S&P Ratings Health Care Outlook Distribution 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% CreditWatch Negative Outlook Negative Outlook Stable Outlook Positive CreditWatch Positive CreditWatch Developing Data as of 9/30/2014 Source: Standard & Poor s Ratings Services. 37 Not For Profit For Profit Insurance

38 Outlook Distribution Trend The majority of outlooks remain stable across all sectors despite health care reform Reform is evolving at a slower pace One to two year outlooks on ratings Good cash flow Not-For-Profit providers cutting costs and building cash reserves, allowing for capacity within current ratings M&A provides growth for some providers 38

39 Outlook Distribution Trend (continued) What is driving the negative bias in FP and NFP (e.g. the providers)? Debt-funded M&A in for-profit Declining utilization trend and reimbursement pressures Growth of risk-sharing arrangements Continued pressure on employer cost increases Rising out of pocket expenses = discriminating consumers = volume and revenue decline = weaker financial profiles 39

40 S&P Ratings Health Care Upgrades/Downgrades Not For Profit For Profit Insurance Data as of 9/30/2014 Source: Standard & Poor s Ratings Services. 40 Upgrades Downgrades

41 Upgrade/Downgrade Trends For-profit Debt-funded M&A is driving many of the downgrades Declining utilization and reimbursement headwinds are impacting providers Insurance Capital perspective: industry in good shape Not-for-profit Clear evidence of broad pressures constraining operating margins, combined with our view that additional cost containment measures will be hard to achieve 41

42 S&P Ratings Health Care Ratings Distribution 70% 60% 50% 40% 30% 20% 10% 0% AAA AA A BBB BB B CCC CC D Not For Profit For Profit Insurance Data as of 9/30/2014. Source: Standard & Poor s Ratings Services. 42

43 Appendix

44 Not-For-Profit Ratings Distribution 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% AAA AA A BBB SG Source: Standard & Poor s Ratings Services. 44 Dec-12 Dec-13 Sep-14 As of 9/30/2014

45 For-Profit Ratings Distribution 70% 60% 50% 40% 30% 20% 10% 0% AAA AA A BBB BB B CCC CC D 45 Dec-12 Dec-13 Sep-14 Corporate Ratings (excludes Financial Institutions and Insurance Ratings) Local Currency Long Term Issuer Credit Ratings Core data provided by the Global Ratings & Regulatory Reporting Group. As of 9/30/2014 Source: Standard & Poor s Ratings Services.

46 Health Insurance Ratings Distribution 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% AAA AA A BBB BB B CCC CC D Dec-12 Dec-13 Sep interactively-rated companies and groups As of 9/30/2014 Source: Standard & Poor s Ratings Services. 46

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