Martin Arrick, Managing Director at Standard & Poor's, talks about the outlook revision on the not-for-profit healthcare sector to stable from negative. He looks at the pros and cons of the Affordable Care Act and highlights some key credit trends in the sector to watch in 2016.
ARRICK: The most important thing is that the providers, the hospitals themselves, in general, are doing much better. We saw that in September when we came out with our annual medians and by and large, all the numbers were positive. We’ve seen it over the course of this entire year, with upgrades and downgrades. Upgrades are running ahead of downgrades. I think that was a bit of a surprise and in part, it really reflected the strength of the Medicaid expansion and the financial benefits that a lot of providers have been able to get combined with really their ongoing cost containment efforts that really have been strong.
Whenever I think about the Affordable Care Act, I always like to pause for a moment and reflect on the fact that there’s roughly 15 million people in our country who now have healthcare coverage that used to not have healthcare coverage. It’s an important change. From a hospital perspective, from a hospital financial perspective, the level of uninsured have declined. Many more folks are on Medicaid that’s had positive financial benefits. When you think about the overall healthcare delivery system, the Affordable Care Act has started us moving towards a more value orientation, more population health management. That does hold the promise of reducing costs or at least bending the cost curve in a more favorable direction. I think that has certainly begun to happen over the last few years.
On the con side of that, I think that’s a little more complicated. In a lot of ways, some of the benefits that folks have already gotten financially from the Affordable Care Act, they’ve peaked a little bit. The change in the payer mix, the improvement of payer mix is now baselined. In some ways, I think we might be at a bit of a financial peak. Some of the underlying issues, which were here, whether or not we had the Affordable Care Act, they’re going to really begin to resurface. Lower use rates as we move to value that does have some implications about revenues for folks that are still in a fee-for-service world. There’s a number of issues, financial issues that we do expect that they will continue to be pressure on operating margins.
Well, I certainly think where does the Medicaid expansion go is an important one. To other states sign up and for the states that already have signed up, where does that go and is it favorable? Does it remain favorable for providers? Consumerism is another important trend we’re watching. There’s consumerism as in your local pharmacy and what are they trying to do to capture your healthcare dollar. There’s a lot going on there. Also consumerism, as in what is your provider doing to reach you in a different way?
E-visits is one example. If we do E-visits, do you, you the provider, get paid for that or do you have to eat that expense? There’s also a lot of disruptive technology in this area where you can call up a physician on your phone and be talking to a physician in three minutes. It’s pretty inexpensive to boot. There’s a lot of issues.
M&A, Mergers, and Acquisitions remains a fairly hot topic. I think the pace of change there-- I don’t think the pace is accelerating, but it’s been on a pretty heavy pace for a number of years. Our expectations is that we’ll continue and the broader movement from volume to value orientation will continue. That is more like a five to seven-year transition, but every year we’re moving in that direction. We certainly expect that to continue.