[December 06, 2016]

Fitch:US Healthcare Outlook Stable Despite Political Uncertainty

Link to Fitch Ratings' Report: 2017 Outlook: U.S. Healthcare (Fundamental Stability Despite Regulatory Uncertainty)

https://www.fitchratings.com/site/re/890582

A low risk of deteriorating fundamentals but high levels of event risk driven by political and regulatory uncertainty are driving the outlook for the US healthcare sector in 2017, according to Fitch Ratings. Healthcare is facing some specific issues under a Trump administration, including the future of the ACA. And debate around drug pricing will become a longer term issue despite the current focus on the ACA.

Uncertainty and turmoil have been persistent throughout the ACA's nearly seven-year history, and the industry is in for more of the same in 2017. However, segments of the healthcare industry benefiting from the ACA will lobby hard to keep the insurance expansion in place. Healthcare providers, specifically acute care hospital companies, have the most to lose if the ACA insurance expansion is gutted because it has resulted in more paying customers for the sector.

About 20 million Americans have health insurance under the ACA, including roughly 10 million through expanded state Medicaid programs and another 10 million in the public health insurance marketplaces. About 85% of exchange plan enrollees receive a financial subsidy to make insurance more affordable. A central focus of President-elect Trump's campaign was repeal of the ACA, but that will prove difficult in practice because Republicans do not have a filibuster proof 60 seats in the Senate, and many parts of the law are popular with the public.

Whatever healthcare policy is ultimately pursued by the Trump administration, development of the healthcare value ecosystem will continue in 2017 as patients and insurers seek ways to reduce spending. Consumers are struggling to bear an increasing share of healthcare costs in light of growth in insurance products like high deductible health plans. During 2016, headlines about the growing financial burden of pharmaceutical products highlighted this issue.

There are two separate issues involved in the drug pricing debate: drug manufacturers taking advantage of supply dislocations to increase prices on established products, and truly innovative new drugs being launched with high sticker prices. While not illegal, the former is not a defensible business model in the long term. The latter is an entirely different issue. Unless there is a significant regulatory change that limits the pricing power of drug companies, drugs that truly provide a superior benefit in terms of efficacy and quality of life improvements will continue to command pricing power.

Heading into 2017, innovative pharma pipelines are full of cutting edge new therapies, and pricing debates on launch will echo those of the hepatitis C and cholesterol-lowering PCSK-9 drugs. At the same time, generic and specialty pharmaceutical companies are taking a hit on the generic pricing issue. Valeant's new management team recently cut guidance a third time. Bowing to public pressure, Mylan introduced a generic version of the high priced EpiPen.

Ultimately, fundamentals in healthcare are solid relative to some other corporate sectors, and Fitch forecasts mid-single digit organic EBITDA growth for most healthcare companies in 2017. Still, headline risk will be a persistent backdrop.

Additional information is available on www.fitchratings.com.

The abov article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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