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The Health Care Credit Beat: Governor Abbott Orders Elective Procedures Postponed

In late June, as coronavirus cases rose sharply in the state, Texas governor Greg Abbott ordered hospitals in eight counties to postpone elective surgeries and procedures that are not immediately medically necessary, to ensure beds are available for COVID-19 patients. Currently S&P Global Ratings does not see a risk stemming from the Governor's executive order to the ratings on the five rated for-profit hospital companies with significant operations in Texas. Nor do we see a risk to the two rated ambulatory surgery center (ASC) companies with a presence in Texas: Surgery Partners Inc. (B-/Watch Neg/--) and Covenant Surgical Partners Inc. (B-/Watch Neg/--). Both had healthy profit recovery rates in May and June and we do not currently anticipate any material impact from the Texas executive order. Surgery Partners has a sizable footprint in Texas; Covenant Surgical's is more modest but the company does have significant presence in California, Florida, and Arizona, states that are seeing surges in coronavirus cases but have not yet called for a postponement in elective procedures.

Learning From The National Shutdown

In contrast to the U.S. Surgeon General's order in March to delay all elective procedures across the country, the order in Texas only affects hospitals, not other providers such as ASCs. Moreover, Governor Abbott's order does not mandate the complete cessation of elective procedures; it allows for them if they don't deplete the hospital's capacity to cope with COVID-19. In other words, unused capacity does not have to stay unused. The Texas Hospital Association indicated last week its hospitals can manage under current conditions and have reserved 15% capacity to care for the influx of COVID-19 patients. We believe this reserve will be tapped into significantly, as the state is seeing a large infection surge.

Table 1

Percent Of For-Profit Hospital Company Total Beds In Texas, Florida, And Arizona
Texas Florida Arizona

HCA Healthcare Inc.

27 25 0

Tenet Healthcare Corp.

23 20 10

Universal Health Services Inc.

32 10 0

Community Health Systems Inc.*

12 15 4

Ardent Health Partners LLC

35 0 0
*Excludes impact of recently announced hospital sales.

Hence, we don't expect nearly the same level of hospital volume declines that we saw with the national order, which was the main reason the hospital sector experienced a significant decline in financial performance since mid-March. The national shutdown created significant pent-up demand for elective procedures, and although we expect some changes in patient behavior, we anticipate the majority of patients will proceed with their procedures. Potential variables could be emergency room (ER) utilization and a stay-at-home order: it is possible ER volume could fall if people react to the Governor's order similar to how they reacted to the national order (by avoiding ERs). Moreover, if the state institutes a stay-at-home order, people may be more inclined to delay elective procedures.

Hospitals are also better prepared today than they were in March, when the pandemic appeared quickly, overwhelming capacity in certain markets. The industry is better equipped and, perhaps more importantly, has a better understanding of how to treat severely ill COVID-19 patients. In addition, the recent surge in Texas is weighted towards the younger population, with approximately 71% of new cases being in individuals between the ages of 20-59. As a result, a smaller percentage of those being hospitalized require care in an ICU. Nevertheless, demand for hospital care in certain locations, such as Houston, could exceed capacity.

There remains a risk of similar executive orders in other states, particularly Florida, Arizona, and California, and we expect the situation to remain volatile and unpredictable. But we believe the industry is better prepared for this unpredictability as it's more experienced with treating this disease and because the government has demonstrated its support, as evidenced by CARES Act grant monies, Centers for Medicare and Medicaid Services (CMS) Advanced payments, the suspension of the 2% Medicare sequestration, payroll tax deferral, and other similar actions. There is also the potential for additional CARES Act funds to further aid liquidity.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The consensus among health experts is that the pandemic may now be at, or near, its peak in some regions, but will remain a threat until a vaccine or effective treatment is widely available, which may not occur until the second half of 2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Recent Rating Actions

The U.S. corporate health care ratings universe is approaching its seventh straight week of no COVID-19 related negative rating actions (see "Health Care Credit Beat: Industry Recovering From COVID-19, But Timelines Vary And Ailments Abound," June 25, 2020). The health care industry appears to be recovering quicker than we expected from the impact of the COVID-19 pandemic, with procedure volume growing significantly, notwithstanding the spike in COVID-19 cases in certain states, such as Texas. However, the continued strength and sustainability of the recovery (e.g., initial surge of returning procedures, followed by a lower level of activity) is the longer term question.

There were a number of non-coronavirus health care rating actions over the past couple of weeks: a downgrade due to Chapter 11 bankruptcy, a revision of an outlook to stable from positive due to issues relating to new legislation, and an outlook revision to positive from developing for a company that had been seen as a potential fallen angel.

Table 2

Recent Rating Actions--Health Care
Company Action To: Rating From: Rating
June 22, 2020

AAC Holdings Inc.

Downgrade D SD
June 19, 2020

Pluto Acquisition I Inc. (dba AccentCare)

Affirm, Outlook Stable B-/Stable/-- B-/Positive/--
June 11, 2020

Mylan N.V.

Affirm, Outlook Stable BBB-/Positive/-- BBB/Developing/--
Source: S&P Global Ratings.
AAC Holdings Inc. (D/--/--); Primary Analyst: Ji Liu

Ongoing operational challenges lead to Chapter 11 filing.   We downgraded the company to 'D' from 'SD' following its Chapter 11 bankruptcy filing. AAC originally defaulted in November 2019, when we lowered the rating to 'SD' from 'CCC' on a missed amortization payment on its term loan, after a period in which the company was beset by operational issues.

The health care industry normally has relatively few defaults (1%-2%), though we have noted a slight uptick in in the past two years. Recent defaults include pharmaceutical company Akorn Inc., hospital operator Quorum Health Corp., laboratory provider New Millennium Holdco Inc, and staffing provider Envision Healthcare Corp. Still, we expect defaults in the industry to remain low relative to other industries.

Pluto Acquisition I Inc. (dba AccentCare) (B-/Stable/-); Primary Analyst: Viral Patel

Adoption of PDGM leading to potential disruptions in cash flows.  We revised the outlook on AccentCare to stable from positive reflecting the CMS' new Patient-Driven Grouping Model (PDGM) claims review and reimbursement scheme, which went into effect this year. We expected it to be a challenge for home health providers' operations, with the potential to pressure cash flows from a working capital perspective as billings and collection timeframes are extended. AccentCare has had to draw on its asset-based lending facility to meet liquidity needs. While we do not expect liquidity issues over the next couple of years as the company adapts to the new reimbursement protocol, we also believe cash flows will be minimal over the next year.

Mylan N.V. (BBB-/Positive/-); Primary Analyst: Matt Todd

Deleveraging takes hold, with sub-3x leverage possible in two years.  We recently affirmed the 'BBB-' rating on Mylan and revised the outlook to positive from developing. Mylan's quest to reduce leverage to under 4x, following its 2016 debt-financed acquisitions of Meda AB, was delayed by several years by the challenging generic drug environment, but the company has finally reached an adjusted leverage of 3.75x for the quarter ended March 31, 2020. Mylan's leading position in the U.S. generic drug market, the limited impact it has felt from the COVID-19 pandemic, and a commitment to further deleveraging (along with the pending combination with higher-margin Upjohn Co. from Pfizer Inc.) leads us to expect the combined company's debt leverage to decline to below 3x in the next two years, which would support a higher rating.

The Upjohn acquisition represents a major entry into the China pharmaceutical market (25% of Upjohn's revenues) for Mylan, and further shift toward branded-generics, which are sold at a premium in many geographic markets outside the U.S. (though still affordable to middle-class consumers paying out of pocket) and differentiated from unbranded generics based on the perception of superior quality. While growth prospects are better and margins could improve, China's new Volume Based Procurement tendering program may pressure revenue growth and margins. Still, with Mylan's strong cash flow generation, stabilization in the U.S. generic environment (albeit with some longer-term challenges, and legal risks), and expected continued deleveraging, Mylan is no longer on our list of potential "fallen angel" credits.

This report does not constitute a rating action.

Primary Credit Analyst:David P Peknay, New York (1) 212-438-7852;
david.peknay@spglobal.com
Secondary Contacts:Jeffrey Loo, CFA, New York + (212) 438-1069;
jeffrey.loo1@spglobal.com
Arthur C Wong, Toronto (1) 416-507-2561;
arthur.wong@spglobal.com

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