Fitch Puts Negative Outlook on Health Insurance, Managed Care

CHICAGO -Fitch Ratings this week revised to negative its outlook on the U.S. health insurance and managed care sector.

Analysts cited a raft of pressures facing the market over the next 18 months, such as state budget crunches that could mean Medicaid cuts for both insurers and health care providers.

Fitch anticipates more downward rating actions for insurers and managed care companies than positive rating actions through next year, saying operating performance for many so far in 2008 indicates a number of pressures facing the sector. They include a decline in earnings that could be due in part to either heightened price competition or an inability to accurately predict medical care costs.

Additional credit concerns include difficulties stemming from large mergers and acquisitions in the last 10 years, particularly in integrating massive information technology systems, the sector's recent appetite for taking on greater amounts of debt, and future Medicare and Medicaid funding levels.

"Operating results alone are not driving the outlook change," said Fitch analyst Peter Patrino in a conference call yesterday. "Market conditions will not significantly improve in 2009 because at this point we don't see any of the issues improving over the coming 12 to 18 months."

One strain on the sector could come from Medicaid reimbursement cuts in states that are struggling with budget deficits. Medicaid often accounts for one of the biggest chunks in state spending plans. Medicaid reimbursements make up 21.5% of combined state spending in 2008, while elementary and secondary education account for 21.4% of state dollars, according to the Fiscal Survey of States report issued in Dec. 2007.

Fitch analysts who follow the credits of tax-exempt health care providers are watching for an impact on the sector.

"It's an area that we as a group are keeping our eye on," said analyst James LeBuhn. "With a deterioration in state budgets due to the slowdown in the economy, we are concerned about potential cutbacks to providers."

California's strategy for bringing down its massive budget deficit provides an illustration of how state budget crunches impact insurers and providers, said Fitch analyst Bradley Ellis.

Facing a budget deficit of around $17 billion, Gov. Arnold Schwarzenegger ordered 10% across-the-board cuts in reimbursements of Medi-Cal, the state's version of Medicaid. The cuts are expected to save the state $550 million this year, and will pressure both insurers that participate in the Medi-Cal program and providers.

Tougher times for managed care companies would likely mean tougher times for nonprofit hospitals in general, LeBuhn said. "The pressure on the managed care providers probably filters down and puts pressure on contract negotiations and ultimately pressure on reimbursement under managed care plans to providers," he said.

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Healthcare industry
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