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Fitch: Weak Volume Trends Present Operating Challenges in For-Profit Hospital Industry
June 27, 2013 / 2:51 PM / 4 years ago

Fitch: Weak Volume Trends Present Operating Challenges in For-Profit Hospital Industry

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Hospitals’Credit Diagnosis (Weak Volume Trend Possible Evidence of Systemic Shifts in Care Delivery) here NEW YORK, June 27 (Fitch) Persistent weakness in patient volume growth despite an improving economy in most areas of the country is compelling evidence that hospital companies are experiencing systemic shifts in care delivery, according to a new Fitch Ratings report. Even accounting for a noisy calendar, a persistently weak trend in organic volume growth was evident across the for-profit hospital sector in first-quarter 2013. Same-hospital admissions dropped 3.8% on average for the Fitch-rated group of companies while same-hospital adjusted admissions dropped 2.7%. Aside from the weak economy, healthcare utilization patterns are likely being influenced by an evolution in patient behavior encouraged by the growth of insurance products with higher patient responsibility for medical costs. At the same time, a shift away from strictly volume-based pricing schemes and toward value-based care continues to influence hospitals. Assuming a continued evolution in the industry toward value-based care, hospitals may find it harder to manage the effects of weak volumes from the topline down, such as through acquisitions or expansion of outpatient capabilities. Rather, there will have to be a bottom-up plan to preserve profitability and hospital management will need to be aggressive in managing the cost of an episode of care. Some recent industry trends, including vertical consolidation, increased collaboration with post-acute care providers and more direct alignment of physician incentives through increasing rates of employment, are evidence of the strategies hospital management has been employing to manage the shifting paradigm. Credit profiles are presently solid relative to ratings in the for-profit hospital sector, indicating that companies have adequate financial flexibility to manage within the context of the weak organic operating trends. However, there are other areas of concern that when compounded by weak operating trends could pressure credit protection measures in future periods. These include regulatory scrutiny, higher debt levels to fund acquisitions and the potential for increased interest expense burdens in a higher rate environment. An active acquisition environment has been supportive of topline growth in the industry, although recent transactions have been small and primarily cash-funded. The strategic rationale for consolidation in the industry is encouraged by reforms favoring larger, integrated systems of care delivery, including the Affordable Care Act. Indicating a possible resurgence of larger M&A in the industry, Tenet Healthcare Corp. (Fitch IDR 'B' on Rating Watch Negative) announced this week that the company plans to acquire Vanguard Health Systems for a total consideration of $4.3 billion. Fitch believes the acquisition is strategically sound because it will enhance the geographic scope of the Tenet's portfolio of care delivery assets and add operational diversification through Vanguard's health plan operations. The Negative Watch primarily reflects risks inherent in the companies' operating profiles, the most important of which is strained FCF generation and industry-lagging profitability. The full report, 'Hospitals' Credit Diagnosis: Weak Volume Trend Possible Evidence of Systemic Shifts in Care Delivery,' is available at 'www.fitchratings.com'. Contact: Megan Neuburger Senior Director +1-212-908-0501 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Bob Kirby, CFA Director +1-312-368-3147 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Fitch Places Tenet Healthcare Corp.'s Ratings on Negative Watch' June 24, 2013 --'The Affordable Care Act and Healthcare Providers: Assessing the Potential Impact', May 1, 2013 --'Fitch's High-Yield Healthcare Checkup', Jan. 30, 2013 --'2013 Outlook: U.S. Healthcare', Nov. 29, 2012 --'U.S. Leveraged Finance Spotlight Series - Community Health Systems, Inc.', Oct. 1, 2012 --'U.S. Leveraged Finance Spotlight Series - HCA, Inc.', Oct. 24, 2012 --'Corporate Rating Methodology', Aug. 8, 2012 Applicable Criteria and Related Research: The Affordable Care Act and Healthcare Providers (Assessing the Potential Impact) here High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies here 2013 Outlook: U.S. Healthcare -- Navigating a Dynamic Operating and Regulatory Environment here U.S. Leveraged Finance Spotlight Series Community Health Systems, Inc. here Corporate Rating Methodology here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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