Despite the ongoing pandemic, the 2021 financial outlook for the global healthcare sector is mostly positive, as strong demand for products and services -- including those related to COVID-19 -- will more than offset lingering pressures from the public health emergency, according to Moody's Investors Service.
The demand will remain strong largely due to aging populations, improving access and the introduction of new and innovative products. The one caveat: Steadily rising healthcare expenditures, which will cause payers to continue to restrict utilization and lower prices.
A handful of themes will shape the global credit picture in 2021, Moody's said. Firstly, the gradual unwinding of fiscal support measures will create credit risks, geopolitical and trade tensions, especially between the U.S. and China, which is expected to be a top policy focus.
There's also the growth of digital service delivery, e-commerce and remote work to consider, which will accelerate changes not only in healthcare but in retail, education, banking and commercial real estate. Social trends will also be a factor, particularly the public health and safety issues stemming from the coronavirus, growing inequality, and other demographic trends and social challenges.
Recovery from the unprecedented economic shock of COVID-19 will be tenuous and inconsistent across countries and geographic regions, while weak earnings and more solvency concerns will weigh on hard-hit companies and governments. Higher debt levels and more relaxed underwriting are expected to erode the positive effects of the low interest rates on debt servicing capacity.
WHAT'S THE IMPACT
Moody's ranks U.S. for-profit hospitals as stable, with volumes expected to gradually recover from 2020 levels, while continued government aid and positive commercial and Medicare rate increases will drive growth.
That outlook could change to negative if earnings before interest, taxes, depreciation and amortization (EBITDA) declines, or if there's a marked decline in higher-paying commercial volumes. On the flip side, the outlook could change to positive if EBITDA grows more than 4%, if there's a decline in bad debt expense, or if there's a stronger than anticipated growth in inpatient admissions.
What's driving the stable outlook is that same-facility EBITDA will grow by a low, single-digit rate; volumes will return to pre-coronavirus levels in late 2021 or early 2022, while unusually high acuity levels will normalize; CARES Act grants will provide earnings support into next year; and managing costs will become increasingly difficult as the pandemic continues.
Adjusted admissions will grow around 4% as the onset of the COVID-19 pandemic nears the anniversary mark, while hospitals continue to maintain sufficient access to testing, personal protective equipment and other critical supplies to ensure the safety of patients and staff.
Net revenue per adjusted admission will grow 0-1%, and hospitals will benefit from good public and private payer rate increases, offset by a reversal of unusually high acuity in the second half of 2021. Profit margins, meanwhile, will be constrained by the need to operate COVID-19 and non-COVID-19 areas, purchase PPE at significantly inflated prices and educate local communities on hospital safety and the risks of deferring medical care. High unemployment will cause adverse payer mix shifts that will pressure profit margins
Technology and innovation will allow more procedures to be done outside of the hospital, but can also significantly help hospitals increase efficiency, improve patient outcomes and save costs, Moody's found.
Yet social risk is high. Near-term, hospitals will need to carefully navigate issues around price transparency. Longer-term, there is potential for new or expanded federal healthcare programs that could pressure reimbursement rates. Hospitals will also need to devote additional resources to managing cyber risk.
U.S. MEDICAL PRODUCTS AND DEVICES
Moody's gave U.S. medical products and devices a positive outlook for 2021, driven by double-digit EBITDA growth that is expected to return to at least 2019 levels. Patient volumes will recover due to pent-up demand for treatment of chronic medical conditions, and expanded COVID-19 testing will fuel strong growth, at least until vaccines are widely distributed. New products, including transcatheter aortic valves, will also aid growth.
Demand for COVID-19 testing continues to accelerate. This will benefit companies that provide diagnostic tests, like Abbott Laboratories and Becton Dickinson, as well as life science companies that provide reagents used in these tests like Thermo Fisher Scientific. Volumes will likely remain high until effective vaccines are widely distributed by mid-2021.
Longer-term trends in place before the pandemic, such as demographics and product innovation, remain favorable. Moody's expects transcatheter aortic valves, where Edwards LifeSciencesCorp and Medtronic are leaders, to return to double-digit growth
Risks remain weighted toward the downside. These include patient willingness to engage with healthcare providers, especially if the coronavirus pandemic worsens. The pandemic's lingering impact on the global economy could also make it more difficult for consumers and governments to fund healthcare expenditures.
Moody's also gave a positive outlook to global pharmaceuticals, driven by expected EBITDA growth of between 4-6%; oncology and immunology drugs, which will be a key driver of sector growth; COVID-19 vaccines and treatments that will drive incremental profits for some companies; modest exposure to patent expirations, except for some biotech drugs; and ongoing pricing pressure that will nonetheless ease somewhat for generics.
Many top products will continue to post double-digit global growth, and innovation remains strong, with a high number of new drug approvals and good pipeline quality for most companies. COVID-19 vaccines and treatments will drive industry revenue and profit higher, even while social pledges limit profit opportunities for some. But companies like Pfizer are likely to see profit contributions from COVID-19 vaccines. Antibody treatments from Regeneron, Eli Lilly and others will also generate profit.
China represents a growing market for the most innovative medicines, but is somewhat tempered by price compression in more traditional categories like cholesterol and high blood pressure.
Most of the industry's growth will be derived from rising volumes and new drug launches. Branded drug prices will modestly decline in Europe and Asia, and any net price growth in the U.S. will be very limited. Patent exposures on traditional oral medicines, meanwhile, are relatively light during 2021, although large biotech drugs like Amgen's Neulasta and Roche's Rituxan, Herceptin and Avastin will continue to face erosion from biosimilars.
Price pressures are manageable for generics, but a low number of new, high-value generic launch opportunities will limit earnings growth in 2021.
THE LARGER TREND
In October, Moody's found that owning a public hospital during the COVID-19 pandemic carries operational risk, which will compound the fiscal and credit difficulties facing many large urban counties across the U.S.
Of the 25 largest rated counties by population, 19 have local government-owned public hospitals. The surging costs of tackling the pandemic, coupled with revenue loss caused by the suspension of elective procedures, are straining public hospital budgets, making hospitals more likely to need support from county governments.
In September, the agency said healthcare revenues for 2020 may be better than originally predicted, with revenues expected to decrease about 10% compared to the original projection of 16%. Moderately impacted sectors like general acute care hospitals, physical therapy and outpatient rehabilitation centers and laboratories can expect revenue declines between 5% and 10%.