State of the Not-for-Profit Industry Brian Williamson and ... TriState Conference/Speaker Presentations...No content below the line Not-For-Profit Sector Outlook: Stable • Broad

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State of the Not-for-Profit Industry and Market Outlook

Copyright © 2017 by S&P Global. All rights reserved.

2017HFMA Biennial Tri-State ConferenceCincinnatiSeptember 21, 2017

Brian WilliamsonDirector

S&P Global


To find articles and watch videosthe team has produced,

please visit:www.SPRatings.com/healthcare

Health Care Research Page

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SPRatings.com/healthcare

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Overview

Agenda

• SectorProfile• 2017OutlookUpdate

ComparativeStatistics

• NationalandRegionalComparisons

IndustryThemes

• StateofACA&PolicyUpdates

• Market-DrivenReformMergers&Acquisitions

4


Overview – Sector Profile

5


Health Care Industry Landscape

Government Insurance companies

• Exchanges

• Privately managed government programs

Federal & State Governments Employers Users (out of pocket)

Underwriting Administrative & Customer Service Marketing

ProductsPharmaceuticals Medical devices

• Branded • Specialty

Pharmaceuticals• Generic• Biotech/Biosimilars

• Cardiovascular• Orthopedic• Surgical Equipment• Monitors• Infusion• Medical Supplies/

Consumables• Others

Laboratory&DiagnosticServicesDistributors

ServiceProvidersNot-for-profit hospitals

& health systemsFor-profit service

providers• Acute Care Hospitals• Nursing/Assisted Living• Home-based Health• Hospice• Behavioral Health • Rehab• Ambulatory Surgical Centers• Dialysis Centers

ContractResearch&Manufacturing

LifeScienceCompanies

6Private & Confidential


Total Active Ratings – Not-for-Profit Healthcare

0

100

200

300

400

500

600

2011 2012 2013 2014 2015 2016

System Stand-Alone



Total Issuance by Agency –Not-for-Profit Healthcare

$-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

2015 2016 2017

S&P Moody's Fitch

Amou

nt ($

mil)



Total Issuance – Not-for-Profit Healthcare

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2015

2016

2017

Amou

nt ($

mil)



Comparative Statistics

10


Active Not-for-Profit Ratings for the Tri-State region


State Numberofratings

Indiana 11

Kentucky 9

Ohio 17

Total 37


Not-for-Profit Health Care Rating Distribution

Includeshealthsystemsandstand-alonehospitals;ratingsasof8/29/2017Source:S&PGlobalRatings

0%

10%

20%

30%

40%

50%

60%

AAA AA A BBB BB B CCC

National Regional



Not-for-Profit Health Care Rating Actions


National

Upgrade Downgrade

43%

57%

Regional

Upgrade Downgrade

38%

63%



Not-for-Profit Health Care Outlook Distribution


0%10%20%30%40%50%60%70%80%90%

100%

Positive Negative Stable

National Regional



Overview – Sector Outlook


Not-For-Profit Sector Outlook: Stable

• ACA’s Medicaid expansion, exchange performance, & management measures helped improve performance through 2016

• Credit quality is beginning to show signs of weakness as negative pressures re-emerge:- Payor mix shifts are beginning to hurt revenue and profitability

- Aging of America (10K boomers a day qualifying for Medicare) - ACA driven swing from uninsured to exchanges (mostly Medicaid)

- Provider sponsored health plan operations are often dilutive- High labor and supply costs including rapid growth in pharma costs- A number of large projects/borrowing (strategic spending) also

impacting credit quality

Recent operating softness is beginning to emerge, although stronger non-operating revenues, sound balance sheets and generally stable business positions are supporting the stable industry outlook. We expect balancedupgrades versus downgrades for 2017.



Not-For-Profit Sector Outlook: Stable

• Broad market confusion remains (i.e. mixed incentives, uneven pace of change toward value orientation, & strength of exchanges)

• Balance sheet strength continues to remain a key credit strength• M&A activity has been generally positive but the pace is slowing• Population health management capacity and ability to manage risk

are emergent differentiator • Ongoing legislative and executive efforts to ‘repeal and replace’ or

otherwise dismantle the ACA raise serious questions about the near to long-term future of health care reform

Recent operating softness is beginning to emerge, although stronger non-operating revenues, sound balance sheets and generally stable business positions are supporting the stable industry outlook. We expect balancedupgrades versus downgrades for 2017.



State of the ACA and Policy Updates


ACA-Driven Expansion: Providers

• As discussed, the initial impact was favorable, particularly in Medicaid expansion states:- Significant shift to Medicaid from uninsured- resulted in incremental contribution to profitability, although uninsured burden

remains

- Organizations in expansion vs. non-expansion states saw upgrades far exceed downgrades due to improved financial profiles & utilization growth

- Expansion has a positive impact on admissions / adjusted admissions- beginning to see this slow down; re-emergence of more traditional forces pushing

inpatient usage rates down

• Going forward, we see emerging negatives:- Medicaid expansion business still a weak payor; now part of baseline- Broader use rate/inpatient admissions declines beginning to re-emerge

selectively- Exchange market under pressure directly via legislation or indirectly via

administrative actions in the absence of legislation



Moving From “Repeal and Replace” To “What’s Next”

• ACA remains law despite ongoing efforts to achieve legislative change in 2017 • Given recent legislative failures to repeal and/or replace, new efforts to dismantle

ACA may shift to the executive branch • Near term credit implications

• For insurance companies: no implications for credit quality. Although national uninsured rate may increase, we don't see it reverting to pre-ACA levels

• For for-profit health service companies and providers: growing negative implications at different rates within the various sub-sectors in the for-profit landscape

• For not-for-profit providers: growing negative implications across the sector with individual impact reflecting local competitive position, demographics and payor mix

• Public hospitals likely to be especially hard hit without other forms of revenue to offset loss of insured volume

• Long term credit implications• Implications for providers: will depend on specific policy changes, each insurer's line

of business exposures, and mitigating strategies adopted to offset any disruptions to their respective markets

• Implications for insurers: legislative or executive action may reduce the size of the ACA individual market and limit future growth in the Medicaid market



Market-Driven Reform

21


Market-Driven ReformValue orientation emerging slowly

• Insurers seeking to offer risk exposure with infrastructure support (data management, processing, etc.) to willing and capable providers.

• Wide range of value arrangements: p4p, bundled payments, shared risk and full capitation

• CMS role in accelerating change less certain • MACRA remains an area of bi-partisan support; expect this to continue the

move to value

Growth of high deductible plans• Re-emergence of old bad debt problems as vast increase in retail

collections • These plans contribute to emerging pricing sensitivity although still limited• Consumerism, high deductible plans, growing sense of competition driving

greater use of narrow networks



Market-Driven ReformConsumerism

• Consumers ‘empowered’ and are more involved in wide variety of decisions about their own care

• Broader non-traditional distribution channels and personnel, and ways to access care becoming essential

• Greater consumer ‘skin in the game’ drives price consciousness

Competition • Heightened competition within and across the sectors and new forms of

cooperation driven ultimately by declining use rates• Continued industry consolidation for providers and some re-emerging non-

mega deal consolidation for insurers• Insurers and provider strategies overlapping; creating alignment, cross

sector collaboration, but also more direct competition from integrated delivery systems



Market-Driven Reform

Strategic Reponses• Private sector innovation both in non-traditional partners, but also in what

is often labeled ‘disruptive technologies’ such as mobile medicine• Virtual arrangements (e.g., Accountable Care Arrangements - mixed

success so far) and other forms of collaboration• Increased pivot on IT spend to better information creation linking clinical

practices (physicians included), financial costs and outcomes to quality improvement goals

• Goal of tying cost savings and quality together still elusive, but seen as necessary for population health management and addressing ongoing federal reimbursement reductions (real and anticipated)



Mergers & Acquisitions

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Mergers & AcquisitionsM&A activity is slowing at the margins

• Smaller more opportunistic M&A will continue - particularly in decentralized markets• Larger mergers will also continue, albeit at a slower pace, and will need to

demonstrate the value proposition/benefit of the mergerNew observations

• Renewed push back from regulators, particularly in previously consolidated markets and/or where the participants cannot demonstrate the value proposition of the merger

• In some markets few unaffiliated partners remain, resulting in the next set of mergers with a higher likelihood to run into legal barriers

• Healthy and strong providers increasingly merging with other healthy and strong entities

Growth in affiliation strategies in lieu of full M&A and “non-traditionals”• Joint ventures/joint operating agreements; clinical networks – often first step to

something more permanent; management contracts – also often first step to something more permanent;

• Affiliations with payers; urgent care/emergent care centers; “disruptive technology”



Thank you

Brian Williamson [email protected]

27


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State of the Not-for-Profit Industry Brian Williamson and ... TriState Conference/Speaker Presentations...No content below the line Not-For-Profit Sector Outlook: Stable • Broad