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Reform makes cash tight for providers, but not pharma and payers


By Bob Herman
Posted: June 20, 2014 - 4:15 pm ET
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Hospitals and other providers face more financial challenges, and perhaps more near-term credit downgrades, than health insurers and pharmaceutical companies as healthcare reform unfolds, according to a new report from Standard & Poor's.

To date in 2014, S&P has downgraded the credit ratings of 31 healthcare organizations—both not-for-profits and for-profits—compared with 22 upgrades. Most of the downgrades affected not-for-profit providers however.

Lower service utilization is the biggest problem for providers, S&P analysts said. Patient admissions and visits began declining in earnest in late 2012, a trend experts initially attributed to the slow-recovering economy.

But now, high-deductible health plans, new payment models that encourage preventive care, and a surge in outpatient and other alternative care sites are the chief drivers behind lower inpatient utilization.

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That shift most affects finances for hospitals and health systems that are still predominantly operating in a fee-for-service, “patient admissions are good” reimbursement setting, said David Peknay, a director in S&P’s corporate healthcare group. “We’re not yet in that value-based environment, that risk-sharing environment where a hospital would be incented to keep a patient out,” he said.

Tulip Lim, associate director of S&P’s corporate healthcare sector, and one of the authors of the report, added that hospital mergers are pressuring the credit ratings of acquiring systems. Providers have looked to mergers as a way to cut costs and increase care coordination, but such unions are coming at the expense of more debt.

S&P’s report contends increased coverage from the Patient Protection and Affordable Care Act—through the private exchanges or Medicaid expansion—won’t be enough to rejuvenate weak margins.

“Over the coming years, we believe healthcare reform and uncertainties about future developments will continue to depress utilization and profitability for providers—and we don't expect the increase in covered lives as a result of the ACA to offset this,” the report said.

However, a new survey from the Henry J. Kaiser Family Foundation found about 60% of people who bought health insurance on the exchanges were previously uninsured, with most of those individuals having had no health insurance for at least two years prior to the new exchange’s coverage. Early indications from health systems in Medicaid expansion states have also showed bad debt is declining as more indigent patients gain health coverage.

By contrast, S&P said health insurers and pharmaceutical giants are benefitting greatly from current economic conditions. Low utilization is buoying the bottom line of payers, as they pay out fewer medical claims, while the pharmaceutical sector is seeing its industry gain ground. Revenue growth for drug companies will range between the mid to high single digits this year, S&P predicts, though price transparency could reduce those gains in the future. For example, Sovaldi, a hepatitis C drug developed by Gilead Sciences, has sparked controversy because it costs $84,000 for a 12-week course of treatment.

Follow Bob Herman on Twitter: @MHbherman


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