With the incoming Trump administration and a Republican-controlled Congress, significant policy shifts are expected for the healthcare industry, from changes to the Affordable Care Act (ACA), the tone at the Federal Trade Commission (FTC) on M&A and tariffs and the priorities of the new head of the Department of Health and Human Services (HHS).
These changes could have profound effects on healthcare companies' credit ratings and financial stability.
Analysts with S&P Global Ratings don't expect a major ratings impact for healthcare companies over the near to intermediate term but anticipate changes will be a net negative for the industry from a credit perspective.
"We do not envision any rating changes due to the change in administration until it becomes clear what policies will be implemented and their time frame. However, we see more downside than upside risk to ratings over the near term," wrote Arthur Wong, healthcare managing director at S&P Global Ratings, in the analysis.
Wong and S&P analysts offered a breakdown of the key developments they are watching from ACA subsidies, Medicare drug price negotiation, M&A activity, tariffs and regulatory changes.
Affordable Care Act
President-elect Donald Trump is highly unlikely to seek to repeal ACA, but House Speaker Mike Johnson has indicated "massive reform" of the ACA is on the agenda, with changes coming for Medicare and Medicaid.
Trump could let several Biden-era premium subsidies enacted in 2021 expire in 2025, leading to potentially 4 million people losing insurance coverage. This represents a negative for healthcare service providers, especially hospitals, according to the analysis. A higher uninsured population would mean fewer people actively seeking healthcare services and higher bad debt expense, especially for safety-net providers and hospitals.
Absent an act of Congress to extend these subsidies, this will result in millions of people facing what the Kaiser Family Foundation estimates would be a 79% average increase in premium costs. The Congressional Budget Office estimated that the level of uninsured in the U.S. fell to an all-time low of 7.2% in 2023 but will increase to 8.9% in 2034, due partially to the expiration of enhanced marketplace subsidies after 2025.
Medicaid will likely come under tremendous pressure under the new administration, given Trump's stated desire to reduce Medicaid financing, according to the analysis. The basic funding mechanism could be changed, possibly into a block grant program which would cap federal funding. The Trump administration also is considering adding work requirements for Medicaid recipients. Further cuts or restrictions to the program would be a negative development for the healthcare services industry, Wong wrote.
Medicare Advantage (MA) has seen significant growth during the past decade, with over half of eligible Medicare beneficiaries are now enrolled in MA plans. The administrative costs associated with these plans include significant preauthorization requirements that tend to be a margin headwind for providers. Consequently, aggressive expansion of the MA program would likely be a credit negative for providers.
FTC lessens scrutiny on healthcare M&A deals
S&P Global analysts anticipate FTC scrutiny on M&A will moderate under the second Trump administration, compared to the Biden administration's aggressive stance under FTC head Lina Khan, who made healthcare one of her areas of focus.
However, concerns about pharmaceutical pricing and escalating healthcare costs in general will mean scrutiny on the healthcare industry will likely remain heightened under a Republican administration, Wong wrote.
Decreased FTC scrutiny may boost mergers and acquisitions, benefiting pharmaceuticals and healthcare services., according to the analysis. Pharma companies have been looking to M&A to diversify their portfolios, deepen their pipelines and spur growth as they face pressures from insurers on pricing, stiffer competition and the looming Medicare drug price negotiation.
The FTC lawsuit against the major pharmacy benefit managers for inflating the costs of insulin in their negotiations with pharmaceutical companies would likely continue as the wave of anti-PBM sentiment persists, S&P analysts wrote.
The FTC also has taken steps to limit noncompete agreements. Given that upward of 40% of physicians operate under noncompete agreements, the ban could be a significant wild card for healthcare service providers that continue to struggle with rising labor costs, Wong wrote.
The IRA and Medicare drug price negotiation
Trump has threatened to roll back the Inflation Reduction Act (IRA), but he earlier expressed support for the Medicare drug price negotiation part of the IRA. But the Trump administration could accelerate or expand Medicare drug price negotiation and make it more onerous for the pharmaceutical industry.
Uncertainty looms, but potential acceleration or expansion could further strain the pharmaceutical industry and is already a negative for the industry as whole, S&P analysts wrote.
Tariffs on medical supplies will raise costs
The U.S. healthcare industry has been increasingly dependent on imports, both for medical supplies like gloves, face masks and syringes and for pharmaceuticals like active pharmaceutical ingredients and finished products, especially from China and India.
Increased tariffs on medical supplies from China and other countries could raise costs for healthcare service providers, adding pressure to an already strained industry from inflation and elevated labor expenses.
"However, we believe the Trump Administration is unlikely to impose hefty tariffs on pharmaceutical imports, especially given the end goal of lowering U.S. drug costs," Wong and other analysts wrote.
For medical supplies, a tariff increase would be a definite negative for healthcare service providers that are still struggling with inflationary pressures that are moderating but remain at elevated levels, according to the analysis.
"The Biden Administration has been cautious on tariffs on medical supplies, as a further rapid increase in tariffs may impose too great a cost on the health care system and it takes time to transition manufacturing to alternate sources. Thus, we do not expect the incoming Administration to raise tariffs aggressively in the near term," Wong wrote.
Broader regulatory changes
Potential healthcare agency picks will likely have a slightly negative impact on the healthcare industry. Appointments like Robert F. Kennedy Jr. to HHS could result in major ramifications for the regulatory agencies underneath it, such as the FDA and the Centers for Disease Control and Prevention.
As the head of the HHS, the federal government's endorsement of vaccines (or lack thereof) could lead to fewer vaccine sales, including those for shingles, pneumonia and RSV. This could be problematic for GSK, Merck, Pfizer, Sanofi and AstraZeneca.
RFK Jr.'s most aggressive position has been his intent to reform the National Institutes of Health, which could drastically change the direction of medical research in the U.S.
"This would likely take far longer than four years to have a major impact on the pharmaceutical industry. The U.S.'s edge in pharma research is due in large part to the government-directed research. A significant shakeup to the status quo could pose longer-term risks to pharmaceutical companies' new drug pipelines," Wong wrote.