S&P, Cautiously: Not-for-Profit Healthcare Outlook Stable in 2017

Standard & Poor's says the outlook for the not-for-profit healthcare sector will be stable in 2017, but the forecast comes loaded with caveats.

The uncertain future of the Affordable Care Act, Medicare and Medicaid is making bond rating agencies anxious.

Standard & Poor's Global Ratings has extended its stable outlook for the not-for-profit healthcare sector in 2017, but not without trepidation.

"This is one of the more difficult decisions we've made," Kevin Halloran, senior director at Standard & Poor's Global Ratings, said in a recent media conference call.

"Everything we look at from a numbers standpoint almost demands a 'stable,' and yet there is a sense in the pit of your belly that maybe the sector isn't as stable as the numbers might indicate," he says.

"We are about to experience a shift in administrations and Congress and some of those changes could be very large and very impactful to the sector and could happen very quickly."

Health systems continue to do better than stand-alone hospitals.

"That's one leading indicator that if you are a little bit smaller, you're a little bit more constrained and you might not succeed going forward," Halloran says. "And secondly, the fairly robust pace of upgrades to downgrades that we saw in '16 appears to be slowing a little."

"As we look forward, it's our belief that the sector has peaked," he says.

"The ACA and its impact along with what hospitals and health systems were going to constrain expenses all came together in 2015. We saw volumes go up. We saw payer mixes improve. We saw upgrades outpacing downgrades, and that really flowed through 2016."

The first three quarters of 2016 were a positive trend with respect to upgrades, but that flat-lined in the fourth quarter, with 11 upgrades and 11 downgrades.

"One quarter does not a trend make," he says. "There was a lot of robust activity in 2015 and it bled into early 2016."

Weakness Coming?
"It appears that this is one of those data points that is starting to say 'there could be some weakness coming in the sector.' It backs up our opinion that we think the sector has peaked from a numeric standpoint. It's hard to hang your hat on these two data points: systems doing better than stand-alones, [and] fourth-quarter results with an even split in upgrades and downgrades. But it is factoring into our thinking."

Martin Arrick, managing director of S&P's Global Ratings' not-for-profit healthcare portfolio, says "healthcare has never been more complicated than it is now" in large part because of the potential for radical change with the repeal of the Affordable Care Act, and major overhauls to Medicare and Medicaid.

"There now is this huge overlay of legislative risk," he says. "We're concerned, and obviously we are going to monitor it fairly closely. It could be traumatic and it's unclear how quickly it could happen."

ACA Equivalent Unlikely
Arrick says it's hard to speculate on what would replace the ACA, because neither the Trump Administration nor Congress have offered any details.

"Obviously, everybody in the field is like 'OK, you've got to replace it with something that creates the same amount of healthcare for the same amount of people,' and I guess we're all feeling that is very unrealistic in terms of expectations," he says. "If it was easy it would have been done already."

Arrick says it's likely that the ACA will be repealed without an equivalent plan in place.

"Our expectations from a credit quality perspective is that there will be huge revenue losses for hospitals and healthcare systems, and in theory there will be some expense reductions because fewer people will be accessing the system as frequently as they are now. That could be a plus or a minus. Our sense is it's likely to be a minus."

With Medicaid expansion, for example, the numbers of uninsured went down and the numbers of insured went up, both of which were credit positives for hospitals and health systems expansion states. It's likely those positive trends could be reversed if Medicaid is swapped out for a block grant program, as some in Congress have proposed.

"That may be revenue-neutral on Day One," Arrick says. "Over time, as medical inflation rises and it's historically always been rising faster than consumer price inflation, our expectation is that some sort of block grant program would not truly capture the increase in costs, and it's like a yearly inflator that fails to keep up over time. It would worsen Medicaid reimbursements."

Block Grants Concerning
Beyond that, Arrick noted that Medicaid is a counter-cyclical program. When states are in recession, Medicaid rolls tend to increase, more federal money comes into the states through the Medicaid program and it has a counter-cyclical impact on the economy.

"With a block grant situation, while we haven't seen the legislation, we have a concern that that mechanism would no longer function as effectively as it does now," Arrick says.

With respect to the proposed Medicare premium support programs, Arrick says the expectation is that vouchers will push more and more costs onto elderly Medicare enrollees.

"I don't know how that would work for providers," he says. "Our expectation is that over time that will contribute to weaker revenues and weaker performance at the provider level."