Fitch Ratings: ‘Successful disruption’ of healthcare may be coming

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An overall stable outlook for the healthcare sector in 2018 the latest report from Fitch Ratings came with a warning that individual companies will likely see a greater number of credit downgrades, while the industry as a whole could soon face disruption by “outside forces.”

In the short term, Fitch said the sector will be somewhat protected by growing demand for healthcare services and “an overall healthy liquidity profile” for most companies. The future of the Affordable Care Act (ACA) and the repeal of its individual mandate through the Republican-backed tax cut legislation will provide some short-term pressure, as Fitch had warned during earlier attempts to repeal the ACA.

“The outlook mix reflects challenges to business models, particularly for healthcare providers focused on inpatient services, generic pharmaceutical manufacturers and certain competitors in the distribution and pharmacy benefits manager space,” the Fitch report said. “Issuers with stable outlooks in those segments have relatively defensible operating profiles and good headroom in rating sensitivities,”

Greater threats, however, loom over the horizon. The report mentioned several potential disruptive forces, from outside forces like Amazon entering the healthcare space to “rapid improvements in technology” moving patients away from hospitals or other centralized settings. Consumerism may also play a more important factor as the industry move towards price transparency thanks to data and analytics tools.

“Unlike the retail and hotel sectors, outside disruption is not prevalent within healthcare because of the complex nature of supplier, customer and payor relationships,” the Fitch report said. “Successful disruption of some competitors could be possible since the industry is not protected by a regulatory moat but it would require significant capital investment and a high degree of strategic expertise.”

The opportunity to exploit “inefficiencies that contribute to the high cost of U.S. healthcare” is there, however, with Fitch saying the industry is “facing secular challenges to pricing power and profitability and these forces are expected to influence certain segments more than others in 2018.”

Fitch predicted more hospitals’ credit ratings will be downgraded than upgraded in 2018. Currently, 73 percent of ratings in the sector are stable, 18 percent are negative, 4 percent positive and 5 percent have no outlook.