Market Overview

Fitch: U.S. Healthcare's Shift to Value Leaves No Sub-Sector Untouched

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NEW YORK--(BUSINESS WIRE)--

The U.S. healthcare industry's shift to value has created a secular upheaval that permeates nearly every sub-sector, says Fitch Ratings in a report published today.

"As the industry grapples with a range of issues, it's increasingly clear that no corner of the healthcare industry will remain totally untouched," says Megan Neuburger, Managing Director, U.S. Corporates. "All types of healthcare companies have some imperative to reshape their business models around the shift to value, and that in itself is creating a host of challenges and opportunities for them."

During the month of August, Fitch's U.S. healthcare team answered investors' questions about the trends cited below, which embody the secular challenges arising from the shift to value.

Lower Acuity Admissions

Some acute care hospital operators with operations in rural and small suburban markets saw weak 2Q16 results. Since it can be difficult to predict the bottom on inpatient hospital admissions in those types of markets, more of the same may be in store.

"Patients and insurers both have price incentives to shift care away from hospitals with their high fixed costs to higher-value settings," says Neuburger. "For hospital companies, this highlights the importance of having a strategy to preserve market share in the long term."

Investments in outpatient facilities like Tenet Healthcare Corp's acquisition of United Surgical Partners, or divestitures in non-competitive markets like Community Health Systems' divestiture of Quorum Health Corp, are both long-term strategies that may be employed by other hospitals, even if they raise execution risk in the short term.

Health Insurance Consolidation

While it is fairly obvious to assume that health insurer consolidation will erode providers' pricing power, Fitch believes that erosion is overstated because price negotiations take place market-by-market.

"Pricing battles will continue to be won and lost at the local market level, so national breadth - both for insurance companies and providers - does not necessarily trump in-market depth," says Neuburger.

The impact of insurer consolidation on the ACA health insurance marketplaces is a complex issue. Acute care hospitals in particular are exposed to this issue, as competitive public insurance markets support lower levels of uninsured patients and uncompensated care, which will bolster cash flows in the longer term.

Medicare Reimbursement Reforms

Vertical consolidation and rationalization of capacity in some segments has been necessary for post-acute care (PAC) providers to adjust to Medicare reimbursement reform. Medicare bundling initiatives will bear fruit for PACs longer-term through better provider relationships and referral sources.

"Initiatives like the Comprehensive Care for Joint Replacement (CJR) model will differentiate PAC providers by how well they reduce financial risk for acute care hospitals under bundled payments," says Neuburger. "The wheat will separate from the chaff along the lines of which PACs have the best physician and referral relationships in place."

The importance of acute care referral relationships will be compounded by the long-term acute care (LTAC) specific reforms such as site neutral payments and the 25% rule.

Generic Drug Pricing

Amid the headlines on significant drug price increases, there is a juxtaposition of a small number of very expensive specialty drug launches that either improve efficacy or are significantly complex to manufacture, and generic drugs with relatively little clinical differentiation.

"At the heart of the recent momentum on drug pricing are the effects of competitive market forces," says Neuburger. "Outside the few drugs making headlines, the U.S. market for generic pharmaceuticals remains highly competitive."

Generic pharma will likely remain highly competitive given the number of new suppliers that entered the market in recent years to accommodate abbreviated new drug applications (ANDAs). This may squeeze the margins of pharmaceutical wholesalers and distributors who profit from the purchase and sale of generics.

Opioid Addiction Epidemic

Efforts to address increasing levels of narcotics abuse has spurred a shift among the way opioid drugs are developed, marketed and prescribed.

"For physicians and policy makers, these efforts constitute rethink of pain management practices from policy to prescription," says Neuburger.

For generic drug manufacturers offering ndirect substitutes or alternatives to opioids, pricing has been an effective tool in grabbing market share. Specialty pharmaceutical companies will feel competitive and regulatory pressures, making strategic deals and drug development important components of their strategy.

The full report, "What Investors Want to Know: U.S. Healthcare: Takeaways from Recent Investor Meetings," is available at www.fitchratings.com or by clicking on the link.

Additional information is available at www.fitchratings.com

Related Research

What Investors Want to Know: U.S. Healthcare (Takeaways from Recent Investor Meetings)

https://www.fitchratings.com/site/re/887285

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Fitch Ratings
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Robert Kirby, CFA
Director
+1-312-368-3169
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com













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