There are some potentially bumpier times for healthcare credit profiles, according to Fitch Ratings.
The sector is “poised for moderate growth across subsectors,” according to the firm’s outlook for U.S. medical devices, care providers, and pharmaceuticals. Steady margins and growth of free cash flow are expected. The forecast for provider revenue growth is 4% to 5% in 2025 based on volume increases, higher reimbursement rates from both Medicare and commercial insurers, and an aging population that will have more need for services.
However, efforts to reduce the size of government agencies and the expansion of tariffs are “neutral to negative for healthcare credit profiles.” The implications vary depending on the type of company.
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A big difference between previous expectations of Fitch and the new administration’s actions has been the intense focus on reducing the size and scope of government agencies. Fitch had expected Health and Human Services Secretary Robert F. Kennedy, Jr., to focus primarily on vaccine assessments but was surprised by “the reduction in overall agency resources to be as rapid and significant as it has been.”
With fewer resources and less emphasis on other areas, there will likely be delays of FDA reviews of new products, which will have an operational impact on when medical device and pharma companies can see contributions to revenues.
One possible outcome will be an increase in merger and acquisition activity as companies look to the strategy as a “backfill at-risk products whose patents begin expiring in earnest over the next two years.” Credit implications of M&A are usually dependent on the specific circumstances and “centered on those with limited headroom, notable execution risk, and/or elongated deleveraging paths.”
Tariffs will have a “moderately negative” impact on the credit profiles of pharmaceutical, medical device, diagnostics, and product companies. While Fitch does add that tariffs will have a lower risk to healthcare providers, given the natural local domestic focus, although they still need equipment, materials, prescription drugs, and diagnostics, so they will feel margin pressure from higher expenses.
The House budget resolution of February 25 generated downside risk to Medicaid reimbursement. If Congress extends the 2017 tax cuts, the House can pass that with a simple majority. To avoid the need for 60 votes, the Senate would need to use the reconciliation process, and that requires budget offsets over a ten-year period. Given the financial impact of the tax cuts on the budget, Medicaid could become a target for cuts.
A large reduction in Medicaid funding would have a negative credit impact, particularly among providers that benefited from new or expanded supplemental payment programs.
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