Healthcare Credit Opportunities Amid Heightened Uncertainty

The healthcare sector has moved past the disruptions caused by the Covid-19 pandemic, but new regulatory and legislative risks have emerged alongside the potential macroeconomic challenges of tariffs and renewed inflation. Despite the heightened uncertainty facing healthcare companies, we believe the sector’s defensive characteristics are a likely source of stability. The need for healthcare is not dependent upon GDP growth, in our view, and structural demand is well supported by aging US demographics.

Healthcare is a broad economic sector, however, and a range of trajectories are likely across subsectors. To capture the diverse factors driving a healthcare company’s creditworthiness, from the perspective of both direct lenders and loan investors, analysis should extend beyond typical metrics like profitability, margins and balance-sheet strength. For example, a provider’s payor mixes the ratio of revenues from government programs like Medicare and Medicaid, private insurance coverage and direct consumer payment—can significantly impact profitability and margins. So, too, can its geographic exposure, as strong national demand for healthcare can camouflage regional, demographic-based variations. Meanwhile, certain subsectors appear to face outsized legislative and regulatory risks under the Trump administration.

In today’s evolving environment, our current preferred subsectors include:

• Revenue cycle management and payor services/cost containment, which have historically generated strong margins and highly recurring revenue streams and are largely insulated from tariff and legislative risks
• Behavioral health, where growing demand for services is outpacing the supply of providers
• Outpatient surgery/ambulatory care centers, which tend to have lower cost structures and more favorable exposures to private-pay revenues than hospitals/acute care facilities 

Regardless of business line, the strongest companies, in our view, will be those able to manage through any potential headwinds by right-sizing their cost structures and/or negotiating higher reimbursement rates from commercial payors, as well as optimizing their footprint to more provider-friendly jurisdictions.