US midterm elections: Fitch sees limited impact on health insurers

Democratic control of both chambers of the US Congress following the midterm elections is unlikely to materially change the near-term credit outlook for health insurers, healthcare providers, pharmacy benefit managers (PBMs), pharmaceutical companies or medical device manufacturers, according to Fitch Ratings.

The rating agency expects existing healthcare funding pressures to persist, although further federal funding reductions are unlikely under the new congressional balance.

• Fitch expects limited near-term credit implications for US healthcare companies despite Democratic control of Congress, as major legislation would require bipartisan agreement.
• Medicaid enrollment restrictions and the expiration of enhanced ACA subsidies will continue pressuring insurers and healthcare providers exposed to government-funded coverage.
• PBMs face continued congressional scrutiny, while pharmaceutical and medical device companies remain more exposed to pricing, patent expirations, tariffs and supply chain risks.

Major healthcare reforms would require bipartisan support because Democrats lack the votes needed to override a presidential veto or overcome a Senate filibuster.

Democrats could use their control of government funding legislation to negotiate healthcare policy changes, but Fitch does not include significant reversals of existing reforms in its base case.

Democrats could seek to restore ACA subsidies and reverse Medicaid cuts

Democrats have indicated plans to restore enhanced Affordable Care Act (ACA) premium subsidies and reverse Medicaid changes introduced through the federal tax and spending legislation.

Both measures would benefit insurers and healthcare providers by supporting enrollment and maintaining access to government-funded health coverage.

Fitch considers these potential changes credit positive but does not assume they will be implemented.

Democrats do not hold the congressional supermajorities required to override a presidential veto or overcome a Senate filibuster. Their ability to advance significant healthcare legislation therefore depends on negotiations with Republicans and the administration.

Control of must-pass appropriations bills gives Democrats a potential negotiating tool to link healthcare priorities with federal government funding.

Fitch considers a negotiated agreement possible if Democrats exchange some healthcare provisions for administration priorities.

Such an outcome could provide targeted relief to affected healthcare companies without fundamentally changing the existing regulatory framework.

Medicaid and ACA enrollment pressures will continue

Fitch expects Medicaid-focused insurers and healthcare providers with substantial exposure to government-funded patients to remain under financial pressure.

Existing Medicaid changes introduce additional enrollment requirements that are expected to reduce the number of covered individuals.

Lower enrollment could weaken premium revenue for Medicaid insurers and reduce patient volumes for healthcare providers, particularly those dependent on public insurance programs. Providers benefiting from Medicaid provider taxes could also face continued financial constraints.

Medicaid enrollment restrictions are expected to reduce covered populations, maintaining revenue pressure on insurers and providers that depend heavily on government-funded patients.

The expiration of enhanced ACA Marketplace premium tax credits creates another challenge for insurers operating in the individual insurance market.

Without the additional subsidies, some consumers are expected to discontinue their health insurance coverage because of higher out-of-pocket premium costs.

Fitch expects those leaving ACA plans to be healthier on average than individuals who retain coverage.

A smaller and potentially less healthy ACA insurance pool could weaken insurers’ risk profiles as healthier consumers leave the market.

This deterioration in the insured population’s risk characteristics could add underwriting pressure for exchange insurers, while reduced coverage would also affect healthcare providers’ revenues.

Pharmacy benefit managers face continued regulatory scrutiny

PBMs and vertically integrated health insurers are likely to remain under congressional and regulatory scrutiny despite the change in political control.

Concerns over prescription drug costs, vertical integration and transparency in PBM operations have attracted bipartisan attention.

Fitch expects Congress to rely primarily on oversight powers and hearings rather than major new legislation to influence industry practices.

Congressional investigations and oversight hearings could increase reputational and legal costs for PBMs and vertically integrated healthcare companies. Regulatory pressure may therefore continue even without substantial changes to federal healthcare laws.

Bipartisan concerns over drug pricing and PBM transparency make regulatory oversight a continuing risk for the sector, regardless of which party controls Congress.

Companies facing congressional inquiries could incur additional legal expenses and reputational damage, although Fitch does not anticipate significant immediate credit effects across the sector.

Pharmaceutical companies face limited changes to drug pricing policy

Fitch expects the credit implications for pharmaceutical manufacturers to remain limited unless lawmakers reach bipartisan agreements on drug pricing.

Pricing reform represents a less likely legislative outcome but could have a greater financial impact than other potential policy changes.

The administration has primarily pursued most-favored-nation drug pricing through executive orders, agreements with pharmaceutical companies and pilot programs.

Congress could introduce legislation to establish these policies in law, broaden their application or increase pricing transparency.

Bipartisan drug pricing legislation could have a more substantial credit impact on pharmaceutical companies than other healthcare policy changes under consideration.

Fitch nevertheless considers patent expirations and supply chain risks more important determinants of pharmaceutical manufacturers’ credit performance.

Without meaningful bipartisan legislation, existing drug pricing initiatives are unlikely to displace patent losses and supply chain exposure as the sector’s principal credit drivers.

Medical device manufacturers remain exposed to tariffs and supply chains

Fitch also expects limited direct credit implications for medical device manufacturers following the congressional elections.

The sector faces fewer immediate financial consequences from the Medicaid and ACA policy disputes affecting insurers and healthcare providers. Tariffs and supply chain disruptions remain the more relevant sources of cost pressure.

Changes in congressional control are unlikely to materially affect medical device manufacturers’ near-term credit profiles.

The rating agency expects these operational and trade-related pressures to persist independently of potential healthcare legislation.

Tariffs and supply chain disruptions remain the main identified cost headwinds for medical device manufacturers, rather than changes to federal healthcare funding policy.