Fitch: U.S. Healthcare Ratings Already Incorporate Healthcare Ruling

June 29, 2012

Fitch’s ratings said its U.S. healthcare ratings already incorporate an expectation of full implementation of the Patient Protection and Affordable Care Act (ACA) and thus there are no changes to ratings as a result of the U.S. Supreme Court ruling that the law is constitutional.

Fitch said this applies to ratings for for-profit hospitals, not-for-profit hospitals, pharmaceutical companies, drug distributors, and device manufacturers.

The ruling means that the coverage expansion elements of the ACA, including the individual mandate and expansion of Medicaid eligibility, remain intact for the moment, and gives states greater control over the Medicaid expansion component of the legislation.

Focus now shifts to the outcome of the November 2012 elections, and Fitch said it expects the ACA will continue to face significant legislative challenges.

The coverage expansion elements of the ACA are scheduled to take effect in 2014 and Fitch said it believes these will have positive implications for the healthcare industry’s operating profile. This is due to both an expected boost in healthcare utilization and amelioration of levels of uncompensated care for healthcare service providers, according to the agency.

On balance, recently or soon-to-be initiated fees, taxes, discounts, and Medicare reimbursement reductions and reforms will dampen the positive operational effects of the coverage expansion provisions, occurring at varying degrees across the sector. For most industry participants, it is unclear if the incremental revenue generated from increased utilization and lower levels of uncompensated care will offset the potential compression in margins, Fitch said.

Fitch believes that healthcare service providers with high levels of uncompensated care stand to benefit the most from the coverage expansion elements of reform. Most healthcare providers have been implementing initiatives to prepare for a shift away from a volume-driven reimbursement environment for some time, including aligning with physicians and establishing electronic medical records, according to Fitch.

Fitch said its analysts believe these initiatives have been heavily motivated by mounting pressure to control the rate of growth in healthcare spending, which is only partly driven by the implementation of the ACA.

Branded and generic pharmaceutical manufacturers, drug distributors, retail pharmacies, and pharmacy benefit managers are also expected to experience an increase in volumes. Fitch expects medical device manufacturers to see lesser benefit from increased utilization, particularly in the cardiovascular market. At the same time, the 2.3 percent medical device tax will pressure margins.

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