Demand drivers for U.S. healthcare will remain intact in 2020 with most companies managing profitability pressures but headline risk remains, says Fitch Ratings. Headline risk will be high due to the overhang of opioid litigation liabilities, Affordable Care Act (ACA) court decisions and election rhetoric. Business models may continue to evolve given the slowly changing payment landscape. Downgrades are likely to outweigh upgrades, with 55% of ratings currently having a Stable Outlook, 29% a Negative Outlook, 9% a Positive Outlook, with the remainder 'CCC' and below rated issuers, to which Fitch has elected not to assign an Outlook.

Potential credit implications of opioid litigation exposure will vary. We expect investment-grade issuers to navigate the litigation with credit profiles intact, given the ability to redirect a portion of cash flow from operations from shareholder returns to litigation payments. Moreover, early indications are issuers will pay cash settlements over a period of years rather than in lump sums, which limits the effect on credit metrics. Fitch intends to treat these cash outflows as a reduction in EBITDA, instead of explicitly incorporating the liability into an issuer's leverage metrics.

The ACA receded from news headlines in 2019 but will return next year due to a pending court decision regarding its constitutionality that might be appealed to the US Supreme Court. If the ACA is struck down without a replacement plan it may result in a disorderly wind down of the insurance expansion elements of the legislation, which could have negative ramifications for cash flow and profitability of segments most exposed to patient liabilities. The ACA has a slight positive effect on the financial profile of most healthcare issuers due to the increase in covered lives.

Stalled progress on major pieces of healthcare legislation, due to political discord in Washington, will insulate issuers from the effects of any new policy measures on profitability during 2020. However, we expect healthcare to be one of the most important policy issues for voters in the 2020 Presidential election. Leading up to the Democratic primary, the issue of access and affordability is being hotly debated but, even if a Democrat wins, there is likely only an outside chance of policy change having dramatic implications for profitability.

A slow changing payment environment tying profits to high value, rather than high volume care, will continue to encourage gradual evolution of business models across the sector. The convergence of business models via strategic M&A is viewed as constructive to credit profiles since it could help companies align value propositions with shifting consumer and payor preferences, despite its potential to reshape issuers' balance sheets.

Median gross leverage is projected to decline slightly compared with our YE 2019 forecast level of mid-2.0x and 4.0x for our investment-grade and high-yield universe, respectively, due in part to the annualization of EBITDA as some companies integrate acquisitions. We do not see a reason for issuers to manage balance sheets differently in 2020, absent a catalyst in the operating environment or a change in credit availability.