Health Care Sector Eventful, Yet Stable In 2010

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imageLast year was an “eventful, yet stable” one for the U.S. health care sector as the Patient Protection and Affordable Care Act (PPACA) was enacted and certain provisions of the bill took effect, according to a new report issued by Fitch Ratings.

While macroeconomic conditions are still weak and top-line pressures remain, the report indicates, financial flexibility—resulting from strong liquidity profiles and fostered by management cost-cutting efforts and low cost inflation--supported ratings in 2010, the report specifies Overall, Fitch anticipates similar patterns in credit profiles in 2011, with credit metrics expected to trend near 2010 levels.

Fitch does not foresee that this year will bring an improvement in the health care industry’s organic volume and pricing trends, unless there is an accelerated macroeconomic recovery and despite easy comparisons against weak 2010 performance, which will help most sub-sectors. The As cost inflation is not currently a major a major “headwind” for the industry, the report’s authors note, operating margins should fare well. Indications of higher structural unemployment levels, coupled with growth in the consumer share of healthcare spending (e.g., through high deductible health plans), support a forecast of weak organic trends over the longer term, Fitch’s analysts purport, adding that these trends could eventually contribute to margin erosion.

Moreover, Fitch expects that liquidity will remain strong, as many issuers availed themselves of favorable rates to refinance existing debt in 2010, have ample cash balances, and generate solid levels of free cash flow. Analysts peg acquisition activity as demonstrating robustness in 2011 as issuers deploy flush liquidity to bolster weak organic growth, especially given generally attractive asset valuations. They characterize the “pipeline” of potential acquisition targets as deep, especially in the for-profit hospital sector, where ongoing dislocation in the tax-exempt debt markets is contributing to attractive asset valuations on not-for-profit and municipal hospitals.

Finally, despite continuing legal and political challenges to the PPACA, Fitch expects implementation of the legislation to progress, for the most part, on schedule in 2011. Among the various sub-sectors, the pharmaceutical and health care provider industries will be the most directly impacted in the near term, through industry fees and various reforms to the government payer reimbursement structure. Rating in 2011 will not have a direct impact on ratings in 2011, the analysts conclude; however, they do expect regulatory risk related to the PPACA to remain at the forefront throughout the remainder of the year,