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TEXT - S&P looks at U.S. health care's future as fiscal cliff looms
December 14, 2012 / 7:56 PM / 5 years ago

TEXT - S&P looks at U.S. health care's future as fiscal cliff looms

(The following statement was released by the rating agency)
    Dec 14 - It's almost the end of the year, and holiday high spirits could be
set to take a plunge if the U.S. government goes over the "fiscal cliff." On
Dec. 13, 2012, Standard & Poor's Ratings Services credit analysts and its deputy
chief economist discussed how the fiscal cliff, along with recent reforms, could
affect the various areas of the health care sector in 2013 and beyond.

With the U.S. economy in its fourth year of a very slow recovery, it still 
remains vulnerable to a shock. Lawmakers have begun to recognize the threat 
that the fiscal cliff represents to the economy, which Standard & Poor's 
believes is an encouraging sign that Congress will reach a compromise. "But if 
they don't, recession is very likely," said Beth Ann Bovino, Standard & Poor's 
deputy chief economist. 

Businesses are sitting on a lot of cash, so they could be ready to invest next 
year once they're confident the U.S. will avoid the cliff scenario. But with 
the labor participation rate at a three-decade low, the unemployment rate is 
likely to remain high for some time as those who left the job market resume 
their attempts to find work and again begin to be counted as unemployed. In 
2010, the U.S. had about four employed people of working age to cover the 
entitlement costs of one retiree. But by 2030, there will only be two employed 
people of working age to cover the costs of one retiree.

For the health insurance industry, a key near-term consideration is the 
expected sustainability of employment growth, along with the sustained 
migration of government-sponsored business toward managed care. And with the 
recent governmental reforms, most health insurers are focusing on readiness 
into 2013.

"Most of the health insurers we rate remain on generally sound financial 
footing as they continue to plan and reposition for market- and 
government-based reforms," said credit analyst Joseph Marinucci.

Credit quality among health insurers is generally strong, and Standard & 
Poor's sees limited potential for rating changes next year.

"We do expect moderate margin compression for 2013, but we don't expect 
operating results to erode to levels that are inconsistent with the ratings," 
Mr. Marinucci said.

For the not-for-profit health care sector, Standard & Poor's outlook is stable 
for 2013, which is largely unchanged from a year ago. But we do see a wide 
range of incremental pressures facing these providers, such as utilization 
rates, which started weakening after the recession, but have since weakened 

"We think the environment will be increasingly negative as these incremental 
pressures begin to accelerate," said credit analyst Martin Arrick. 

IT spending has boosted profitability, but in general providers have been 
spending a lot of time cutting costs, and will they continue to.

"It's a huge driver of performance these days," noted Mr. Arrick.

Moreover, Standard & Poor's has built a lot of cushion into these ratings.

"We've had a lot of cases where systems are coming in with strong numbers, but 
we've been conservative in our assessments due to operational issues," said 
Mr. Arrick. "So the ratings will be able to hold, at least for a while," he 

The biggest question for 2014 and beyond, however, is who will get insurance 
from the insurance exchanges.

"If it's the uninsured, that's a good story for providers, but if it's those 
with commercial insurance, it's not so good," said Mr. Arrick.

For U.S. states, the half-speed recovery has been very challenging. For nearly 
all states, Medicaid is the No. 1 or No. 2 expense item, and they generally 
have less control over this being that Medicaid is a federal program that they 
share the cost in.

"Moreover, it's a countercyclical program, which makes it very difficult to 
manage," said credit analyst Robin Prunty. "And the rate of health care 
inflation has been much higher than the regular rate of inflation."

States have had to make tradeoffs between funding services (including 
Medicaid), balancing the budget, and restoring budget reserves.

"Still, U.S. states continue to constitute one of the more creditworthy 
sectors that we rate at Standard & Poor's," Ms. Prunty said. "We think 
stability will depend on pace of recovery."

Implementing health care reform is right around the corner now for 
states--they begin debating the fiscal 2014 budget in early 2013. "Among the 
biggest issues is identifying and estimating those residents that are 
currently eligible for Medicaid, but not enrolled, and will likely enroll due 
to the mandate," said Ms. Prunty. States will not receive enhanced federal 
matching funds for coverage of these individuals. 

The pharmaceutical industry is used to thinking about cliffs, but not the 
fiscal kind. "These companies worry about the patent cliff--that is, branded 
products coming off of patent protection and going generic," said credit 
analyst Lucy Patricola. "We expect generics to grow at double-digit rates at 
the expense of branded."

The pharmaceutical companies that Standard & Poor's rates are global, highly 
resilient, and highly rated.

"Our 2013 outlook is for the industry to continue at fairly low growth of 
1%-3% because of the patent cliff," said Ms. Patricola.

Growth in European Union countries will be negative because of 
cost-containment policies. "But the emerging markets could post double-digit 
growth as economies mature, insurance becomes more available, and 
pharmaceutical distribution increases," she said.

The biggest issue for these companies, however, is that of pharmaceutical 
companies' pricing power in the U.S. and whether that will come under pressure 
over time.

"We've been thinking for 20 years that the U.S. government could impose broad 
price controls," said Ms. Patricola. "But at this point, our 2013 expectations 
assume a continuation of historical trends and good pricing flexibility in the 

The situation is a little different among for-profit providers, the ratings on 
which largely are in the 'B' category (i.e., 'B+', 'B', or 'B-'). They have 
narrow businesses, and are highly leveraged and thinly capitalized. These 
issuers could be hurt if we go over the cliff, but that is not the economic 
scenario we are using in our 2013 expectations. Standard & Poor's assumes 
payroll trends continue to improve modestly, along with a gradual improvement 
in the utilization rate.

"Still, in our view, most of the providers could absorb a sequestration cut of 
2%," Ms. Patricola said.

Almost 90% of the for-profit providers we rate have a stable outlook, but they 
have low ratings overall. Capital markets are very supportive of this sector, 
so we're seeing additional leverage come on.

"And when it comes to reform, it's too early to tell who will be the winners 
and losers," said Ms. Patricola.

While the fiscal cliff could have implications for the U.S. health care 
sector, we're not expecting that scenario to come to fruition.

"Our base case is that the U.S. avoids the cliff, and we continue to view the 
likelihood of another recession at 15%-20%," said Ms. Bovino.

 (Caryn Trokie, New York Ratings Unit)

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