Compared to three years ago, healthcare organizations today are facing heightened challenges — including regulatory changes and constrained financial markets — that impact their bottom line.
In a recent Healthcare Quarterly report from Moody's Investors Service, analysts outlined the financial profiles of various healthcare subsectors to determine their financial strength relative to three years ago and examine how well-prepared they are, from a credit perspective, to face the challenges that lie ahead.
Nonprofit hospitals. Nonprofit hospitals' financial profile is stronger now than three years ago, according to Moody's. Operating cash flow growth has returned to normal levels, which has contributed to improved leverage rations, including debt to cash flow and maximum annual debt service coverage. Nonprofit hospitals have also seen an increase in cash reserves. According to Moody's, stronger finances will help nonprofit hospitals mitigate the challenges associated with increasingly stringent reimbursement models.
For-profit hospitals. The financial profile of the for-profit hospital sector is weaker than it was three years ago, primarily due to higher leverage in the wake of increased M&A activity. The sector's median debt/EBITDA increased substantially between 2012 and 2015, as consolidating companies failed to effectively reduce leverage as much as expected, according to Moody's. However, Moody's analysts expect modest de-leveraging over the next year will improve the sector's financial viability.
Health insurers. Despite the disruption caused by the implementation of the Affordable Care Act in 2014, health insurers' credit profiles have generally remained stable since 2012. This is primarily shown through stronger earnings over this period due to diversification and rational pricing. However, U.S. health insurers' financial flexibility was weaker at the end of fiscal 2015 than in 2012 as acquisition financing increased debt levels and leverage rations and decreased coverage metrics, according to the report. However, Moody's analysts expect the major acquisitions that have closed or are planned to close in 2016 — Centene-Health Net, Aetna-Humana and Anthem-Cigna — will result in integration challenges and required divestitures, further disrupting operations.
Branded pharmaceutical companies. Brand name pharmaceutical companies are financially weaker than they were three years back as debt levels rise faster than growth in EBITDA and cash levels, according to the report. This is largely due to the increasing scrutiny the media and presidential campaign has aimed at drug prices, and the rising threat of legislation to control them. However, the passage of any price-controlling laws is difficult to predict and has historically faced significant obstacles. Despite rising debt, the pharmaceutical industry's financial profile remains strong overall as a result of high cash levels at many companies, high profit margins and strong free cash flow, according to Moody's.
Generic pharmaceutical companies. Leaders in the generic pharmaceutical industry are financially weaker than they were three years ago, largely due to consolidation fueled by debt-funded mergers and acquisitions. However, many generic drugmakers are larger and more diversified today, both in terms of product and geography. Additionally, many of these companies have invested heavily in research and development to support a stream of new product launches, which will help mitigate the impact of pricing pressure in any given geography or treatment area.