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Published by: api-227433089 on Nov 08, 2013
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Industry Economic And Ratings Outlook:
The Outlook For U.S. For-Profit HealthCare Will Remain Stable With ModestNegative Bias
Primary Credit Analyst:
Lucy B Patricola, CFA, New York (1) 212-438-3006; lucy.patricola@standardandpoors.com
Table Of Contents
1213966 | 301674531
Industry Economic And Ratings Outlook:
The Outlook For U.S. For-Profit Health Care WillRemain Stable With Modest Negative Bias
Standard & Poor's Ratings Services expects its ratings on the U.S. for-profit health care companies it rates to remain broadly stable heading into 2014, with a modest negative bias. Although the Affordable Care Act dominates headlines,we continue to believe the Act will not have a meaningful impact on issuers in 2014, but we remain cautious of theeffect the new law will have on this sector over the longer term. We do not see any appreciable near-term impacts because the number of newly insured lives that we expect in 2014 remains a fraction of the total insured population.Going forward, key uncertainties at this juncture include: the sign up rate on the federal and state-based insuranceexchanges, specifically the composition of the newly insured population; migration of individuals who loseemployer-sponsored coverage to the exchanges; utilization of health care services by the newly enrolled; the choice of coverage, including high deductible plans; and the reimbursement rates negotiated by the plans.
Economic Outlook 
The key macroeconomic factors that influence our view of the for-profit health care sector include a sluggish U.S.economy and ongoing pressure to reduce the government's overall health care spending. Job creation has beennominally positive, but increasingly characterized by part time employment. We revised consumer spending down inour September forecast to 2% from 2.5% in March. We believe both trends contributed to lower utilization of healthcare services this year. In addition, our international issuers face ongoing pricing pressure from European single payorhealth systems, supplemented by good growth in emerging markets.
Effect On Ratings
Capital markets remain receptive to the sector, and many issuers continue to access the markets to address debtmaturities, covenant tightness, or to fund growth and value strategies. Since the third quarter of 2012, the ratio of positive to negative rating activity shifted to below 1:1, with upgrade to downgrade activity at about .35:1 for 2013. Weattribute about 75% of downgrade activity this year to increasingly aggressive financial policies with operationalchallenges accounting for the balance. Stable outlooks dominate the portfolio, but of those that are not stable, aboutthree quarters are negative or on CreditWatch negative.Our economists publish quarterly upside and downside scenarios, which contemplate alternatives to their base case.While our ratings do not directly incorporate these alternative scenarios, they do represent an important input into ourrating process, particularly with issuers for which we are considering an outlook revision or rating change. In periodsof economic volatility, we believe these alternative scenarios are particularly valuable to consider.
1213966 | 301674531
Table 1
2013-2014 Industry Economic Outlook For U.S. Health Care
Forecast/ScenariosDownside* Baseline* Upside* Actual CommentBaselineimpact onsector
2013 2014 2013 2014 2013 2014 2012
Macroeconomic indicators
Real consumerspending (%change)1.74 1.48 2.03 2.76 2.31 3.68 2.2 Consumer spending continues to growmodestly, supporting utilization rates.SomewhatFavorableTotal nonfarmpayrolls135.83 136.53 136.01 138.58 136.17 140.04 133.74 Although unemployment is still high, jobsare being created slowly, which shouldlead to increases in higher paying privatecoverage segment.SomewhatFavorableS&P 500operatingearnings pershare ($)102.39 88.29 106.26 113.75 109.35 134 96.82 We expect corporate profit growth tomoderate in 2014, which suggestsemployment growth will continue, butremain slow.SomewhatFavorable
Industry drivers
Federal surplus(fiscal-yearunified, bil. $)(702) (783) (698) (726) (695) (669) (1,089) Continued large federal budget deficitsshould continue to place downwardpressure on Medicare reimbursements,which would hurt service providerrevenues directly and productmanufacturers more indirectly.Unfavorable*Based on our U.S. economic forecast "Legends Of The Fall", published Sept. 13, 2013, on RatingsDirect.
Industry Credit Outlook 
We believe pharmaceuticals and related companies should see modest revenue growth in 2013
Big pharma
We expect low-single-digit revenue growth for the industry overall in 2014, as new product launches offsetpatent losses on significant products. Despite an improving rate of new product introductions, the introduction of generic drug competition once patents expire will constrain performance. In 2014, products with U.S. sales of about$17 billion will lose market exclusivity. We expect the Affordable Care Act will have a slight positive effect on thevolume of prescriptions written, although the majority of the volume is likely to be generic. We expect the trend of double-digit declines in branded drug prescriptions to continue, with generic prescriptions taking an increasing shareof total prescriptions written. Generics now comprise 84% of all U.S. prescriptions. Branded volume declines are offset by price increases; we believe average prices on the top selling drugs increased by about 11%, year to date.
Specialty pharmaceuticals 
Most of our rated specialty pharmaceutical companies are experiencing mid- tohigh-single-digit organic revenue growth in 2013 because of demand for existing marketed drugs, with acquisitionspushing reported revenue growth into the double-digits. We expect this level of growth to continue in 2014, and wewould attribute any negative deviation from this trend to company-specific operating problems or selected patentexpirations. We do not expect the Affordable Care Act to benefit specialty pharmaceutical companies because most of the incremental volume will utilize generic drugs and also because specialty pharmaceutical companies still havepricing power and patent protection on their branded products.
1213966 | 301674531
Industry Economic And Ratings Outlook: The Outlook For U.S. For-Profit Health Care Will Remain Stable WithModest Negative Bias

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