Health care costs have been rising steadily and are about to ramp up even faster as baby boomers hit the retirement age and their bills shift from the private sector to the federal and local governments. For the health care market, this means good news--more business. But it also spells bad news--corporate and governmental belt tightening over reimbursement. Senior credit analysts and health care industry executives offered their views on how demographic pressure will affect industry developments and credit quality at Standard & Poor's U.S. Corporate Health Care Hot Topics Conference in New York.
Growing longevity and advances in medical science have meant that spending on health care have tripled, as a percentage of GDP, in a single generation. This means considerable growth for those involved in health care, aged care, and related pharmaceutical business. On the other hand, their related costs place considerable uncertainty over the future of the sector.
With health care spending currently topping 15%of GDP--twice as much as in the U.K. and 50% more than Canada--the U.S. outspends by a considerable margin all other high-income economies. While it has been fashionable to blame the pharmaceutical companies for this prodigious growth--in fact, only 12%-15% of U.S. health care dollars pays for drugs; spending growth pervades the entire health care sector. However, there is little evidence to show better health care results. Indeed, on a number of measures, results fall behind those of other Western countries.
"On the face of it the U.S. doesn't get good value for its health care dollar," said Paul Coughlin, executive managing director, Standard & Poor's Corporate and Government Ratings. "Moreover, by primarily linking health insurance to employment, the U.S. has built considerable rigidities into the labor force," he added. "Indeed, you could characterize employee health care costs as a millstone around the neck of corporate America, exacerbating its cost competitiveness problems in an increasingly competitive world." Mr. Coughlin noted that modernizing economies, such as China--often at the behest of Western advisors--have shed their social security obligations and associated costs.
While an aging U.S. population certainly means more business for the health care sector, companies in this field have paradoxically made a variety of strategic and financial choices that have the potential to damage their credit quality. This year, Standard & Poor's has downgraded about two-thirds more ratings than it has upgraded for its U.S. corporate health care issuers. This trend could well continue in 2007, considering there are four times as many negative outlooks than positive outlooks in the industry.
"Surprisingly, the desire of companies to capitalize on this health care industry opportunity has been responsible for most of the corporate health care rating downgrades this year," said Standard & Poor's Managing Director Michael J. Kaplan. "For instance, acquisitions create financial risk, and business integration issues often create a negative credit bias."
The same aging U.S. population that is currently enhancing domestic health care asset values is likely to contribute to increasing reimbursement pressures. The major third-party payors of health care in the U.S.--the government and employers--are acting to stem increases in the cost of medical care.
In a move to control rising health care costs, the federal government is promoting the use of managed care plans more actively than ever before. An important aspect of this policy shift is the offering of Part D prescription drug coverage for Medicare beneficiaries. "From a cost standpoint, Part D has potential long-term implications for drug prices if Medicare leverage in the purchase of pharmaceuticals is aggressively exercised," noted Mr. Kaplan.
Employers also are seeking to mitigate the cost of health care for current employees, as well as retirees. "Employees are faced with increased medical deductibles and co-payments and reductions in benefits coverage," said Mr. Kaplan. "Also, retiree health care funding problems for both corporations and state and local governments will become more obvious as more explicit accounting occurs within the next couple of years."
The fiscal problem in rising health care costs is very real. "Current taxes will not pay for promised health care entitlements," said David Wyss, Standard & Poor's chief economist. "Ultimately, then, there will need to be a major revision of health care benefits, and/or more major tax hikes, to compensate for the impending impact of the elderly in the U.S."
Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at <http://www.ratingsdirect.com> www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at <http://www.standardandpoors.com> www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.
Media Contact:
John Piecuch, New York (1) 212-438-1102; john_piecuch@standardandpoors.com> john_piecuch@standardandpoors.com
Analyst Contacts:
Paul Coughlin, New York Michael J Kaplan, New York (1) 212-438-7842 David Wyss, New York (1) 212-438-4952
Standard & Poor's, a division of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of financial market intelligence, including independent credit ratings, indices, risk evaluation, investment research and data. With approximately 7,500 employees, including wholly owned affiliates, located in 21 countries. Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit http://www.standardandpoors.com.
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