Healthcare Sector Quarterly: Challenging Regulatory Backdrop Looming for Healthcare Services Industry, With ACA Exchange Subsidies Set to Expire

In the second-quarter 2025 edition of the healthcare sector quarterly, we discuss relative value of credits within the sector and challenges posed by the upcoming expiry of the Affordable Care Act, or ACA, exchange enhanced premium tax credits and by the One Big Beautiful Bill Act.

We also highlight a spate of lower-credit-quality debt issuances toward the end of July, provide a recap of stressed and distressed credits, and touch on credit rating changes, including an outlook change for medical care organization, or MCO, Centene, and a flurry of downgrades related to the healthcare staffing industry.

Effective July 4, the One Big Beautiful Bill Act, or OBBBA, adds uncertainty about Medicaid enrollment, state budgets, Medicare spending and the future of rural healthcare in the United States.

The more onerous provisions of the bill become effective in 2027. Regulatory challenges that present more of a risk over the next six months include:

• Oct. 25: Disproportionate share hospital, or DSH, payment cuts effective, which would result in an $8 billion reduction in DSH payments for 2026, 2027, and 2028, resulting in a total of $24 billion in payment cuts;
• Jan. 1, 2026: Expiry of ACA exchange enhanced tax credits; and
• Mid-January, 2026: Potential triggering of Medicare sequestration cuts within 14 days of Jan. 3, 2026. (The Office of Management and Budget, or OMB, must issue sequestration order within 14 days after the end of the current congressional session, i.e., session 1 of the 119th Congress, which ends on Jan. 3, 2026.)

The exchange tax credits have been instrumental with regard to ACA enrollment. 2025 enrollment was about 24.3 million, up from 12 million in 2021. About 93% of enrollees rely on premium tax credits.

For health operators, exchange payments are higher margin than Medicaid, though it may be debatable how margin accretive exchange rates are for operators. Christopher Wyatt, a senior vice president at HCA, said in November 2024 that the exchange rates are the second-highest next to commercial.

However, Ardent CEO Martin Bonick said some exchange plans do not pay adequate rates. He said that management has not quantified how much revenue the terminated plan represents but that it “is one of the larger plans that [generated volume] increases for [the company in 2025].”

Bonick said the rates are more closely aligned with Medicare rates than commercial, in part because of high payment denial activity and “a disproportionate share of ER visits, which are typically margin dilutive.”

Politico reported on Sept. 4 that 10 House Republicans are pushing for new legislation that would extend the subsidies for one year (past the 2026 midterms). According to Politico, “the current roster of Republican co-sponsors is composed of some of the most vulnerable incumbents of this election cycle.”

The more onerous provisions of the OBBBA will probably begin to have an impact on hospitals and other care providers in 2027:

• July 4, 2025: Cap on state-directed payments implemented;
• June 1, 2026: Interim final rule on Medicaid work reporting requirements released;
• By Sept. 30, 2026: Enrollee notification of upcoming Medicaid work reporting requirements;
• Dec. 31, 2026: Medicaid work reporting requirement implementation begins;
• Dec. 31, 2026: States required to redetermine eligibility for Medicaid expansion enrollees every six months instead of annually;
• Jan. 1, 2027: Individuals earning an income who lose Medicaid coverage due to work reporting requirements are prohibited from being eligible for ACA marketplace premium tax credits;
• July 2028: Limits on Medicaid provider taxes (effective upon enactment, but states have at most three fiscal years to transition existing arrangements);
• Oct. 1, 2028: States required to impose cost-sharing of up to $35 per service for Medicaid expansion enrollees with incomes above 100% to 138% of the federal poverty level.

The delay provides time for companies to attempt to adjust their cost bases and lobby for potential changes. Brendan Buck, head of communications for Keep Americans Covered, told healthcare and life sciences-focused online news publication Statnews that September is a “very important month” when it comes to advocating for the inclusion of an extension of the enhanced premium tax credits in a funding package that must pass by the end of September to avoid a government shutdown.

Statnews noted that September may also be a key month because enrollment for 2026 health plans starts in November, and participants will be subject to price increases if the subsidies aren not renewed.

States are already beginning to respond by cutting costs. According to non-emergency medical transportation, or NEMT, company Modivcare’s first day declaration in connection with its chapter 11 filing, states are already implementing budget cuts arising from: i) the OBBBA and ii) the Budget Control Act of 2022 and American Rescue Plan Act of 2021, which have resulted or are expected to result in additional Medicare payment reductions.

Secretary of the North Carolina Department of Health and Human Services, or NCDHHS, Devdutta Sangvai, said in an Aug. 11 letter that it will start to cut $319 million from Medicaid by implementing rate reductions of 3% across all providers as well as rate reductions of 8% or 10% for select providers and “elimination of certain services altogether.”

The letter says that the state needs $819 million to maintain current services and provider payments. However, the North Carolina General Assembly budget, which passed during the first half of 2025, includes $600 million. The appropriation under the program results in only $500 million of funding because of the program’s administrative requirements:

According to Sangvai, there have been funding shortfalls in recent years, but the state was able to compensate by using federal coronavirus pandemic and other federal funding options, which are no longer available.

We believe that with greater eligibility requirements and less federal funding, there will probably be more uninsured individuals, lower reimbursement rates and fewer services covered, translating to less revenue for care providers:

Companies that provide services to hospitals, such as emergency medicine, diagnostic imaging and anesthesia, would be at risk. Further, if employers and employees are increasingly price sensitive, higher-margin commercial volume growth could decelerate or decline.

Octus will hosting a webinar on Sept. 17 at 11 a.m. ET to discuss OBBBA’s Medicaid provisions and their potential effects. Click HERE to register.

Additional key conclusions are below:

• We believe that DaVita’s 2033 bonds should outperform relative to Acadia’s over the next 12 months because Acadia is free cash flow negative and Medicaid represented 56.9% of Acadia’s second-quarter 2025 revenue whereas DaVita’s unlevered free cash flow is 14.5% of debt (levered is 9%), and Medicaid represented 6.4% of DaVita’s overall revenue. Acadia’s LTM free cash flow was negative $315 million, but management may pause spending because of OBBA uncertainty. Although many of Acadia’s behavioral patients will likely be exempt from the OBBA Medicaid work requirements, Acadia still receives payments from Medicaid supplemental programs, which are expected to amount to about 7% of FY 2025 revenue.
• Under “stress test” assumptions (1% year-over-year growth, 10-bps margin deterioration, cost of debt ranging from 9.75% to 10.875%), Community Health would struggle to generate free cash flow. Our illustrative analysis excludes cash flow from working capital generation, which has been inconsistent. Community Health’s capital structure, payor mix and exposure to non-urban hospitals render it vulnerable to potential negative regulatory impacts.
• During the second quarter of 2025, insurance providers generally cited higher costs due to greater utilization, but care providers experienced lower-than-anticipated admissions growth, and several adjusted guidance lower. The reason for the discrepancy appears to be at least partly attributable to payors experiencing increased utilization in areas such as behavioral health, home health and pharmaceuticals.
• Payor and care provider commentary regarding acuity, denials and payment collections reflects ongoing tension. Certain payors argue that greater acuity trends are at least partly due to upcoding intensity, and care providers contend that payors are increasingly aggressive about denials and payments. On June 23, health insurance providers including Blue Cross Blue Shield, UnitedHealthcare, Centene, Cigna, CVS Health Aetna, Elevance and Molina announced commitments to streamline and reduce prior authorization, with “demonstrated reductions by [Jan. 1], 2026.” However, in 2018, AHIP, Blue Cross Blue Shield, the American Hospital Association and other major providers issued a “consensus statement” regarding ways to make prior authorization less burdensome, so some industry experts remain skeptical.
• CMS is proposing an aggregate 6.4% reduction in Medicare payments to home health agencies in 2026 from 2025 levels. Aveanna CEO Jeffrey Shaner said the company would have likely targeted an acquisition within home health for the latter half of 2025 but is “a little more muted at the moment to really see where Home Health lands.”
• B and B- issuers Patterson, TeamHealth, Community Health and RadPar took advantage of market conditions toward the end of July. Patterson’s financing was suspended after the company tried to price debt financing at the height of tariff-related volatility.
• Our distressed recap includes the Summit Behavioral Health pro rata liability management exercise, or LME. Summit Behavioral Healthcare launched a pro rata liability management exercise to secure $125 million of new money with no discount capture that is expected to receive very high participation. The new money will come in the form of a super senior first lien, first-out, or FLFO, term loan, backstopped by an ad hoc group of majority lenders.Summit’s offer expired Aug. 13, with close to 100% of creditors participating. Octus’ Private Company Analysis team has prepared an analysis of Summit Behavioral Healthcare’s LME.
• BBB- rated managed care organization Centene faces heightened downgrade risk after cost pressure results in withdrawn guidance. MCOs such as Centene are grappling with lower-than-expected market growth and greater morbidity resulting in increased costs.

Trading comparables are shown in the chart below:

DaVita, Acadia – We Still Believe DaVita’s 2033 Bonds Provide Superior Relative Value

We still believe that dialysis center operator DaVita’s 2033 bonds provide superior relative value to Acadia’s, but there are new mitigating factors that we must take into consideration.

We said on June 12 that DaVita’s 6.75% senior unsecured notes due 2033 yielding 6.4% appear to provide superior relative value to behavioral health services provider Acadia’s 7.375% senior unsecured notes due 2033 yielding about 6.7%. Acadia’s notes were issued in March and DaVita’s in May.

We noted that although DaVita has struggled with patient treatment volume growth, the company still generates robust free cash flow. As of June 30, LTM unlevered free cash flow (after netting out distributions to noncontrolling interests) was 14% of total debt.

Acadia’s FCF remains negative, and management does not expect the company to be FCF positive until exiting 2026.

We were also concerned with potential challenges depending on the severity of Medicaid cuts. Medicaid represented 56.5% of Acadia’s fiscal year 2024 revenue, up from 53.9% in FY 2023.

The spread between the two credits has ranged from about 30 bps to roughly 70 bps since May:

Work requirements under the One Big Beautiful Bill Act signed into law on July 4 specify mandatory exemptions, including parents and caretakers with children ages 13 and under, individuals who are “medically frail,” and individuals who are pregnant or postpartum, among others. The “medically frail” designation includes individuals with substance use disorder or a “disabling” mental disorder, and those with “serious or complex” medical conditions.

Acadia management believes a “significant majority” of the behavioral health operator’s populations will be exempt.

Nevertheless, for 2025, Acadia expects gross revenue of about $230 million from existing state Medicaid supplemental programs (about 7% of LTM revenue). Over half of the expected revenue comes from states that could start reducing these payments in fiscal 2028, management said during the second-quarter 2025 earnings call. A portion of the revenue loss would be offset by a reduction in provider taxes that Acadia pays.

CEO Christopher Hunter said that given the uncertainty created by the bill, management is going to “take a harder look at capital spending and [the company’s] pipeline of projects.” Acadia may pause some of its expansion capital spending, which would “enable [Acadia] to unlock more of the underlying free cash flow of [its] business at a faster pace.”

Thus, on the one hand, Acadia is free cash flow negative, but management may pause spending, which could help with cash generation. Further, the OBBBA may not have a material financial impact until 2028, and many of Acadia’s patients will be exempt.

On the other hand, Acadia still benefits from Medicaid supplemental programs, which are at risk, and management is concerned enough about potential regulatory challenges to reevaluate the company’s capital spending program.

Community Health said that it expects to receive $200 million from the sale of LabCorp as well as $100 million contingent payment from the sale of Tennova Cleveland, “in the back half of this year.” Management is “continuing to pursue some additional divestiture opportunities.”

There is $1.75 billion of debt coming due on March 15, 2027, which becomes a current maturity in March of 2026. Addressing and pushing out that debt maturity is “[at the] top of [Community’s] list of things [it] want[s] to get handled,” management said during the company’s earnings call on July 24.

The following day, Community announced that it would issue $1.5 billion senior secured notes due 2034 to repay a portion of existing 5.625% senior secured notes due 2027. The offering was upsized to $1.79 billion and priced at 9.75%.

The maximum amount of the 2027 notes that Community will purchase, pursuant to a tender offer that was launched along with the 2034 note offering, is $1.757 billion.

The company’s mid-case FY 2025 guidance calls for $12.45 billion of revenue and a 12.1% EBITDA margin. The midpoint of FY 2025 guidance implies capital expenditures amounting to about 3% of revenue.

Medium-term guidance calls for mid-single-digit net revenue growth and a mid-teens adjusted EBITDA margin.

Under a “stress test” scenario involving 1% revenue growth and 10-bps margin deterioration each year, and a 10.75% cost of debt, the company may struggle to generate free cash flow with $9 billion to $10 billion of debt:

Since there is about $11 billion of debt and cash generation from working capital has been inconsistent, we do not believe the longer-dated and junior securities within the current capital structure provide adequate margin of safety given the challenging regulatory environment.

Working capital trends below show that working capital consumed cash flow in eight of the last 10 quarters, but LTM working capital as of June 30, 2025 improved from LTM levels as of June 30, 2024:

When asked about Tenet’s lobbying priorities during the company’s second-quarter 2025 earnings call, Sutaria said it was discussing mechanisms to extend the ACA exchange subsidies.

Originally, under the ACA, individuals with incomes between 100% and 400% of the federal poverty level who were not eligible for public coverage or had access to coverage through an employer were eligible for advanced premium tax credits, or APTCs. The APTCs provide financial assistance for people to purchase health insurance coverage through the ACA exchanges.

In response to the coronavirus pandemic, Congress passed the American Rescue Plan Act of 2021, which provided for, among other things, expanded eligibility for the premium tax credit and enhanced credit amounts. The changes were extended under the Inflation Reduction Act budget reconciliation measure for tax years 2023, 2024 and 2025. In February 2024, about 93% of marketplace enrollees, or 19.3 million, received APTCs, up 35% from 14.3 million enrollees in February 2023.

Hospitals have benefited over the years from exchange volume growth. HCA benefited from 40%-plus growth in exchange volumes in 2024 because exchange enrollment growth was about 30%. Healthcare exchange volumes for HCA were up 15.8% year to date through June. Exchange volumes account for 8% of equivalent admissions, and ACA payments represent 10% of net revenue.

For second-quarter 2025, Tenet saw a 23% year-over-year increase in admissions from ACA exchanges and a 28% year-over-year increase in revenue. ACA exchange volumes represent 8% of Tenet’s total admissions and ACA exchange-related payments represent 7% of total revenue.

Commentary from HCA in 2024 would suggest that healthcare exchange payment rates are a relatively high margin revenue source. HCA CFO MIchael Marks said in November 2024 that healthcare exchanges payment rates are typically between Medicare and commercial, and “they’re a little closer to commercial,” making healthcare exchanges the second-best payor.

Universal Health Services CFO Steve Filton has noted that about 5% of the company’s acute care patients are exchange patients. Assuming half those patients lose coverage, 2.5% of Universal’s patients would stop coming to the hospital for elective procedures, resulting in lost profit. Those patients would continue to come to the hospital for emergency procedures, and the hospital operator would be on the hook for the cost of treating those patients without receiving reimbursement. Using those “broad assumptions,” management arrived at a potential $40 million to $50 million impact (roughly 5% of acute care EBITDA).

Ardent’s management team, however, said that while Ardent has seen 40% year-over-year growth in exchange admissions in the first half of 2025, reimbursement rates for the exchange population are less favorable and more closely aligned with Medicare than commercial rates because of “high denial activity and a disproportionate share of ER visits.” Ardent terminated a plan because management deemed the rates inadequate.

The executives added that the current exchange population contributes less to EBITDA than its volume might suggest and called it a misconception that any revenue decline would directly impact EBITDA.

How Do Exchanges Work?

Effective Jan. 1, 2014, individuals and small groups were able to purchase federally subsidized health insurance plans.

The plans must meet standards established by the federal government, including a requirement to cover certain essential health benefits.

The plans have different tiers – platinum, gold, silver and bronze. The tiers determine premiums, out-of-pocket costs and deductibles:

Managed care organizations, or MCOs, enter into contracts with the Centers for Medicare and Medicaid Services, or CMS, for state marketplace programs and are paid monthly rates for each member (“per member per month, or PMPM”). The contracts have a one-year term ending on Dec. 31 and must be renewed annually.

Rates for marketplace plans offered by MCOs are typically developed during the spring for policies the following calendar year. MCOs will make estimates of utilization of services and unit costs, as well as non-benefit expenses such as administrative costs, taxes and fees. The premium rates that the MCOs are paid are filed for approval with state and federal authorities in accordance with regulations, including minimum loss ratio thresholds.

The actual rates received by hospitals and other care providers vary little by tier. As membership moves to different products, care providers may end up with more or fewer covered individuals within their networks and may end up with better or worse pricing depending on how they are priced within those networks.

If the enhanced premium tax credits sunset, some individuals may remain on the exchanges (especially those who still receive financial assistance), but they may drop down a tier (for example, silver to bronze). A certain number of enrollees may go back to employee-sponsored insurance, and a certain percentage will become uninsured.

During the second quarter of 2025, insurance providers generally cited higher costs due to greater utilization and acuity.

Care providers, however, experienced lower-than-expected admissions growth, and several adjusted guidance lower.

Acute Care – Admissions Growth Below Expectations, Medicaid Volumes Weaker

Community Health’s management is expecting lower admissions growth than previously forecast. Prior guidance reflected 2% to 3% adjusted admissions volume growth. Updated guidance reflects 0% to 1% adjusted admissions growth.

The company’s same-store inpatient admissions increased 0.3% year-over-year, while adjusted admissions were down 0.7%. Same-store surgeries declined 2.5% and emergency room visits were down 1.9%.

HCA lowered its guidance for equivalent admissions to a range of 2% to 3% for full-year 2025, down from 3% to 4% originally anticipated.

During the second quarter of 2025, Medicare admissions grew 3% for HCA, which was slightly below expectations, Medicaid volumes were “down slightly,” and self-pay was “up slightly,” which were both below expectations.

Similarly, Tenet Healthcare reduced its admissions guidance to a range of 1.5% to 2.5%, from 2% to 3%.

During the second quarter of 2025, on a same facility basis, adjusted admissions to Universal Health’s acute care hospitals increased 2% year over year, Within acute care, Universal Health experienced “a little bit less Medicaid volume and a little bit more commercial, exchange volume in particular,” which “ drove somewhat more favorable pricing.”

Behavioral – Shift From Inpatient to Outpatient, Acadia Sees Lower Medicaid Volumes

Universal Health’s behavioral health adjusted admissions were up 0.4% year over year during the second quarter of 2025. For the six-month period ended June 30, volumes were down 0.6%. The company’s long-term target calls for 2.5% to 3% growth.

During Universal Health’s second-quarter 2025 earnings call, an analyst asked if management had seen any differences in demand by acuity for specific services. Filton said that management is seeing strong demand across a variety of diagnoses and services but that the challenge is whether the industry has the physical capacity and labor force to meet those demands.

He attributed “a significant chunk” of the increase in behavioral care medical costs for payors to outpatient volumes. During the second quarter of 2025, United Health’s behavioral health outpatient volumes grew faster than inpatient, marking a change from the first quarter.

The company plans to open 10 to 15 new outpatient facilities per year over the next several years. Management explained that the “bigger issue is just really staffing them with the therapists and creating a flow of patients.” Within certain geographies, Universal Health’s volume growth has been muted because of the company’s inability to hire all the staff it needs, whether that be nurses, therapists or mental health technicians.

Management believes that within the behavioral subsegment, payors have been trying to shift patients from the inpatient to outpatient setting. The dynamic is not new, but “there’s more of an emphasis on it.” Management said that the company has “not necessarily capture[d] … [its] fair share of that outpatient business.”

Behavioral health operator Acadia Healthcare’s volumes were also below expectations. Same-facility patient days were up 1.8%. The company said its same facility results are affected by “a handful of underperforming facilities,” with one facility in particular facing “strong local market pressures.”

Generally, though, there was weakness throughout Acadia’s portfolio in certain markets with higher Medicaid exposure. The company said the “pressure on Medicaid volumes [was] consistent with what peers experienced during the second quarter.” Acadia’s Medicaid volumes were down slightly on a year-over-year basis, while commercial and Medicare volumes were up 9% and 8%, respectively.

Acadia said that managed Medicaid plans are navigating elevated cost pressure, which is having an impact on admissions trends across inpatient services.

Centene – Higher Medicaid Behavioral, Home Health Costs, Broad Marketplace Utilization

Centene CEO Sarah London said during the company’s second-quarter 2025 earnings call that it had higher-than-expected medical cost growth within its Medicaid business line due to a step-up in costs in behavioral health, home health and high-cost drugs.

London said that within Medicaid, the company is not seeing broad-based trends. “Inpatient looks fine, [emergency department] looks fine, [primary care physician], or PCP is right on track.” For Centene, New York and Florida accounted for a majority of the company’s cost “miss” during the second quarter.

Within Centene’s marketplace segment, however, the company experienced “broad utilization across categories … [including] inpatient, outpatient, ER, [and] PCP.”

Elevance – Emergency Room Visits, Behavioral Health Utilization Higher

Elevance CFO Mark Kaye said on the company’s second-quarter call that there was a higher utilization within “several cost categories in ACA – notably, emergency room visits, behavioral health services, [and] some prescription drugs in specialty pharmacy.”

The company also highlighted long-term services and support, or LTSS, behavioral health, and inpatient medical surgery care as sources of higher utilization within Medicaid.

Molina – Behavioral, Pharmacy, Inpatient, Outpatient Medical Costs Higher

Molina CEO Joseph Zubretsky said during Molina’s second-quarter-2025 earnings call that within its Medicaid segment, the company continues to experience higher medical costs related to pressure in behavioral, pharmacy, inpatient and outpatient care.

Higher inpatient utilization during the quarter was driven by a higher volume of admissions for complex health episodes, due to more emergency room visits. There was also an increase in outpatient utilization during the quarter because of primary care visits and preventative screenings, many of which resulted in subsequent treatment with specialists.

UnitedHealth – Inpatient Utilization Accelerated Through Q2, Driven By Emergency Room

UnitedHealth saw inpatient utilization accelerate through the second quarter, as the company continues to see utilization increases in emergency room and observation stays.

HCA’s payor mix and patient acuity drove revenue growth of 6.4% year over year for the second quarter of 2025, slightly above the upper end of the company’s long-term 4% to 6% guidance.

Similarly, Tenet’s second-quarter-2025 revenue per adjusted admission rose 5.2% year over year because of payor mix and acuity.

Wakely Consulting Group calculated that “demographic normalized risk” rose more than 8.3% and 8% when comparing 2023 and 2024 with 2025 for the January-to-April period (the calculation is based on the “plan liability risk score,” which is an estimate of the plan’s costs based on the relative health of its members).

Some payors are saying that higher acuity is at least partly due to a care providers using technology more in their revenue cycle processes in an attempt to maximize reimbursement by coding procedures to reflect greater patient risk:

• Centene CEO Sarah London said that Centene has seen a step-up in coding intensity partly driven by hospital revenue cycle activity. She added that as the hospital operators integrate AI into their revenue cycle operations, Centene is integrating AI into payment integrity to keep pace.
• Elevance CEO Gail Koziara Boudreaux said hospitals are using “AI-enabled coding tools” that can increase acuity and unit costs.

Care providers, meanwhile, have continued to raise concerns about prior authorization and payment denials:

• Acadia Healthcare CEO Christopher Hunter said during the second quarter of 2025 that for managed Medicaid patients, there can be general friction throughout the patient with regard to authorization for admission, or there may be authorization challenges “on the front end” where operators have needed “frequent approval” for “things that were streamlined before.”
• Tenet CEO Saumya Sutaria said that the industry has trended up overall regarding denials and time taken to collect money. He said in some instances they are “highly inappropriate.” Tenet said that it remains focused on “producing accurate documentation and coding” to help mitigate risks that may arise during the prior authorization and collection periods. Tenet is “adapting to the current environment … [by moving] to [a] much more technology-driven and workflow automation-driven [solution].”
• Universal Health Services CFO Steve Filton said that the company feels the impact of the managed care industry’s challenges in its day-to-day revenue cycle interactions with payors. He added, “If you talk to anybody who works in our revenue cycle in either behavioral or acute, they’ll just describe to you what is sort of a daily slog of having to counter aggressive behavior on the part of payors all the time and denials and denial appeals and appeals of patient status changes.”Universal Health Services has invested in third-party consulting reviews of its revenue cycle practices to help improve operations to “counter the payors.”
• Ardent Health CFO Alfred Lumsdaine said that the company saw a pretty big step-up in denials toward the end of the second quarter of last year, which has persisted and grown in FY 2025.

CMS has issued a series of proposed and final rules regarding 2026 rates. As noted above, the proposed rule for home health is expected to present challenges for industry operators.

A list of final and proposed fees is below:

Physician Fee Schedule – 2.5% Efficiency Adjustment

On July 14, CMS released the calendar year 2026 Medicare Physician Fee Schedule proposed rule. The proposed physician fee schedule includes a base rate hike of 2.5% reflecting a temporary one-year 2.5% update in the OBBBA.

The American Medical Association explained that the conversion factors “reflect two different, small permanent updates to the baseline beginning Jan. 1, 2026, as required under the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015.”

Under MACRA, physicians who are qualifying participants in advanced alternative payment models, or APMs, will get a “permanent 0.75% update, [the aforementioned] temporary 2.5% update and a 0.55% budget-neutrality adjustment.”

The conversion factor for physicians who are not qualifying participants “reflects a permanent 0.25% update, a temporary 2.5% update and a 0.55% budget-neutrality adjustment.”

Medicare payments to doctors are based on relative value units, or RVUs, which are used to place a value on medical services and are intended to cover the cost of labor and practice expenses.

CMS explained that in the past, it has relied on data provided by the AMA relative value scale update committee, or AMA RUC, to estimate practitioner time, work intensity and practice expense. According to CMS, research has demonstrated that “the time assumptions built into the valuation of many PFS services are … very likely overinflated.”

To mitigate the effects of overinflation, CMS’ proposed rule includes for the first time an “efficiency adjustment” to work RVUs, which cuts them by 2.5%.

If the proposed ruling becomes finalized, reimbursements for almost 9,000 billing codes mostly associated with specialty care, would decline 2.5%, which would affect rates for billing codes associated with services such as surgery, diagnostic imaging, outpatient care, pain management and orthopedics, according to healthcare focused magazine Modern Healthcare.

Summit – Pro Rata LME Receives Close to 100% Participation

Summit Behavioral Healthcare launched a pro rata LME to secure $125 million of new money with no discount capture. The LME received close to 100% participation and closed on Aug. 13.

The new money was provided in the form of a super senior first lien, first-out, or FLFO, term loan, backstopped by an ad hoc group of majority lenders. Backstop parties are receiving a $4.375 million premium in the form of FLFO loans. The new-money FLFO, which pays SOFR+575 bps, matures on Dec. 31, 2029, with an embedded maturity extension clause.

All existing term lenders were able to participate in the new money under the condition of agreeing to a roughly one-month extension on their existing term loan holdings. The company can subsequently refinance its extended paper with new SOFR+425 bps first lien, second-out, or FLSO, term loans due Dec. 31, 2029.

Since the target participation level of extension was met, the debt maturity will initially be extended to December 2029, before being further extended to December 2030 if liquidity at the end of 2027 exceeds $10 million, according to sources.

If participation fell below the company’s target level, the transaction would have turned into an extend and exchange, with participating lenders benefiting from dropped-down assets, which would punish holdout lenders.

Upstream Rehabilitation – 2L Creditors Asked to Provide New Money

Upstream Rehabilitation’s $140 million second lien notes are indicated down about 12 to 15 points to 45/50 as of Sept. 9 from 60/62 around Sept. 1. The $573 million first lien notes have remained stable and are indicated at about 82/84 as of Sept 9.

As part of outpatient physical care provider Upstream Rehabilitation’s negotiations with its lenders for a potential amend-and-extend transaction to address the maturities of its $573 million SOFR+425 bps first lien term loan due November 2026 and $140 million SOFR+850 bps second lien tranche due 2027, lenders in the second lien debt have been asked to provide new money, according to sources. The new money may come in the form of junior capital, the sources said.

The second lien lenders, represented by Paul Hastings and Perella Weinberg Partners, may want to take a majority of the equity in exchange for providing new financing, but sponsor Revelstoke Capital is unlikely to support such a change of control, the sources said.

The ad hoc group of first lien lenders represents more than 80% of the first lien term loan due November 2026, according to sources. The group is working with Gibson Dunn and Moelis and has been operating under a cooperation agreement, as reported.

S&P Global Ratings downgraded Upstream’s first lien senior secured debt to CCC from CCC+ on June 20.

Modivcare Chapter 11 – 1L Creditors Slated to Receive 98% Equity Subject to Dilution

On Aug. 20, NEMT operator Modivcare filed for chapter 11 protection in the Southern District of Texas.

Treatment

Octus analyzed treatment under the restructuring support agreement on Aug. 26. The analysis concluded that $871.7 million of first lien claims are slated to receive a $200 million exit term loan and 98% equity, subject to dilution by the DIP backstop premium (20% equity), and management incentive plan (8% equity). The full analysis, along with an Excel download, is available HERE.

Modivcare Cleansing Material Assumptions

Modivcare Inc. disclosed an 8-K filing with a cleansing materials presentation dated Aug. 20 and other attachments related to its previously announced chapter 11 filing.

The company provided the following table relating to its 2025-’26 profit and loss outlook:

The trading prices of Modivcare’s debt, along with the assumptions above, translate to an enterprise value to unlevered free cash flow ratio of 6.9x to 9.8x.

Modivcare is forecasting that revenue will decline 12.6%, which we believe appropriately reflects an attempt to account for the high degree of uncertainty the company faces regarding its customer relationships amid an increasingly challenging operating backdrop for insurance payors.

Nevertheless, there is a risk that the debtors lack visibility into revenue trends given the difficult operating environment. For example, the company’s current cleansing documents forecast $124 million of EBITDA, which is 25% lower than the $166 million forecast provided in a January preliminary outlook included in cleansing materials.

The debtors said that during the first half of 2025 and through July, Modivcare experienced operational challenges, including nonrenewals from “certain key customers, as well as delays in repricing and a failure to transition to fee-for-service contracts.”

Under a fee-for-service model, there is a fee for each service performed, based on the cost of transportation.

Under shared-risk contracts with reconciliation provisions, a fixed payment is received as prepayment during the month service is provided.

The prepayments are periodically reconciled on the basis of actual cost and/or trip volume, which may result in refunds to the customer (payables) or additional payments due from the customer (receivables).

Shared-risk contracts provide more certainty regarding margin because contracts with risk corridor provisions allow for profit within a certain range. When Modivcare reaches a profit level threshold, the company discontinues recognizing revenue and instead records a liability within its accrued contract payable account. Conversely, if profit does not reach a certain level, Modivcare records an asset within its receivable account.

Modivcare’s description of the type of contracts is below:

Modivcare’s working capital has been volatile since 2020. During the height of the pandemic when utilization was low, adjustments in Modivcare’s shared-risk contracts resulted in a buildup of contract payables because Modivcare owed money to insurance providers to account for the fact that Modivcare’s costs were below a certain threshold.

Conversely, when utilization spiked, Modivcare’s costs rose above the contractual threshold amount, so Modivcare was owed money (that is, accounts receivable balances increased).

An important element of Modivcare’s efforts to improve the variability of its cash collections was the transition to a fee-for-service payment structure. The company was expected to move about 25% of its revenue to a fee-for-service structure.

We believe the failure to transition to fee-for-service along with the nonrenewal may speak to an increasingly difficult relationship that Modivcare has with state Medicaid and Medicare agencies as well as managed care organizations, or MCOs.

The first day declaration highlights state Medicaid agencies and MCOs steadily increasing focus on cost containment, resulting in lower reimbursement rates. After a spate of downward guidance revisions, including from Medicaid-focused MCOs Centene and Molina, as well as a ratings outlook change, it has been widely reported that MCOs are grappling with elevated medical costs in fiscal year 2025.

The intense focus on cost containment by MCOs is likely to continue through the back half of 2025 and well into 2026 and potentially beyond, given the possible regulatory challenges posed by the expiry of the Affordable Care Act exchange subsidies, the OBBBA, and the increased use of AI tools by care providers resulting in increased coding intensity. State Medicaid agencies will probably have to focus on cost management as well, for similar reasons.

Thus, even though Modivcare is forecasting a 12.6% decline in revenue, it is likely hard to forecast with accuracy because Modivcare’s counterparties are also facing financial pressure, and the regulatory environment is poised for dramatic changes.

Similarly, we think it is difficult to have confidence in Modivcare’s projected $201.7 million swing in working capital to positive $48.3 million from negative $153.4 million.

From 2022 through 2024, the NEMT business generated $189 million of incremental revenue and faced $240 million of incremental costs.

The incremental margin for the personal care services, or PCS, and remote patient monitoring, or RPM, businesses has fared better. PCS incremental revenue was $77 million, and there were $79 million of incremental costs. For RPM, there was $10 million of revenue and $7.7 million of costs.

NEMT segment costs mostly increased because even though average monthly members have declined due to Medicaid redetermination, the remaining cohort took more non-emergency medical trips.

The debtors are forecasting a decline in gross profit margin stemming from the inability to completely offset $331 million of revenue loss with lower service expenses. We believe this reflects: i) continued pressure regarding utilization, especially because many Medicaid enrollees may be worried about losing coverage; ii) cost containment efforts which have helped lower total cost per trip for the NEMT segment; and iii) caregiver wages.

Lower reimbursement presents risk to gross margin, and within the RPM segment specifically, if there is member attrition, there could be higher deactivation costs related to device returns and service shutdowns.

Regarding utilization, there is longer-term uncertainty because of the regulatory landscape. Many OBBBA provisions, such as the Medicaid work requirements, target the Medicaid expansion population. Medicaid expansion has had an inordinate positive impact on young adults ages 19 to 25.

It is unclear what impact work requirements will have on the Medicaid population. However, since younger people are generally healthier and are often less inclined to navigate bureaucratic roadblocks, there is at least a risk that Medicaid work requirements result in a less healthy Medicaid population.

If that is the case, then Modivcare may be faced with the ongoing issue of declining membership but heightened utilization, which could pressure margin.

LifeScan – 1L Creditors Receive New 1L Debt, Equitization Election Option

On July 15, LifeScan Global Corp., a Malvern, Pa.-based blood glucose monitoring and digital health technology firm, and several affiliates filed chapter 11 petitions, saying they have a “clear path” to restructure approximately $1.4 billion of total liabilities through a chapter 11 plan that equitizes secured debt while simultaneously pursuing a dual-track section 363 sale process.

The debtors’ plan features the rejection of “onerous” rebate agreements, which is expected to result in smaller but more profitable U.S. operations (on an EBITDA margin basis).

In October 2018, Platinum Equity acquired LifeScan from Johnson & Johnson for $2.1 billion.

The debtors enter bankruptcy with a restructuring support agreement with at least 97% of lenders and equity sponsor Platinum Equity. Broadly, under the RSA:

• First lien term lenders would receive new first lien term loan debt at a principal amount determined by the amount of cash available at emergence and the option to participate in a potential 20% equity allocation.
• Second lien term lenders would would receive 95% of the direct or indirect equity of the company (subject to dilution by the potential equity allocation to first lien term lenders, advisory equity and management incentive plan, or MIP); and
• General unsecured creditors, including all third lien term lenders (and any second lien term loan deficiency claims), would share in a $10 million cash pool.

Genesis Healthcare Pursuing Sale Process With ReGen as Stalking Horse

Genesis Healthcare Inc., a Kennett Square, Pa.-based operator of skilled nursing facilities and assisted/senior living communities, and several affiliates filed chapter 11 petitions in the U.S. Bankruptcy Court for the Northern District of Texas on July 9. The debtors are pursuing a chapter 11 marketing and sale process for all of the company’s assets, backed by private investment entity ReGen Healthcare as stalking horse bidder. The cases would be funded by a $30 million junior DIP financing facility from the company’s existing term loan lenders.

The company’s financial distress was severely compounded by the Covid-19 pandemic, which led to higher operating costs for labor and supplies and caused operational disruptions, while government funding was insufficient to cover the increased costs. Insufficient Medicaid reimbursement rates, particularly in Pennsylvania and New Jersey, also contributed significantly to the company’s financial struggles.

The Villages Health System Pursuing Sale Process With Humana’s CenterWell as Stalking Horse

The Villages Health System, an operator of primary and specialty care centers in north central Florida and the healthcare system for The Villages retirement community, filed for chapter 11 protection on July 3 in the Bankruptcy Court for the Middle District of Florida. The debtor says the filing was precipitated by an internal investigation revealing potentially $350 million in Medicaid or Medicare overpayments due to “historical coding practices.”

The company is seeking to sell substantially all its assets as a going concern to stalking horse CenterWell Senior Primary Care (Vitality) Inc., the healthcare services business of Humana Inc., for $50 million in cash. The stalking horse bid is conditioned on the bankruptcy court approving the sale free and clear of successor liability claims, including any claims relating to Medicaid or Medicare overpayments and any penalties, assessments or other charges issued by a governmental authority. The stalking horse bid contemplates employment offers to “all or substantially all” of the debtor’s current employees.

Acadia Downgraded Following Earnings Report

Moody’s Ratings downgraded Acadia’s senior unsecured ratings to B1 from Ba3 on Aug. 19, citing the behavioral health operator’s negative free cash flow and weakness regarding volume growth.

The ratings agency forecasts that Acadia will generate negative FCF in 2025 because of its heightened capital investment in operations as well as costs relating to investigations and other related issues at certain facilities.

As we noted above, Acadia may reduce its capital spending because of increased regulatory uncertainty.

Centene Downgrade Risk Heightened Given Cost Challenges, Regulatory Uncertainty

Managed care organizations have been pressured by heightened medical costs. Centene’s downgrade risk is heightened because of the ongoing cost pressure and increased uncertainty stemming from the regulatory landscape.

Centene said on July 1 that it was withdrawing its previous 2025 GAAP and adjusted diluted earnings per share guidance. Centene said that it “recently received and analyzed its first view of 2025 industry Health Insurance Marketplace (Marketplace) data from Wakely, an independent actuarial firm, covering 22 of Centene’s 29 Marketplace states, and representing approximately 72% of the Company’s Marketplace membership.”

Based on Centene’s interpretation of the data, as well as the managed care organization’s discussions with Wakely, “the overall market growth in the 22 states is lower than expected and the implied aggregate market morbidity in those states is significantly higher than, and materially inconsistent with, the Company’s assumptions for risk adjustment revenue transfer used in the preparation of its previous 2025 consolidated guidance.”

S&P placed its BBB- issuer credit rating for Centene on CreditWatch with negative implications on July 7.

The ratings agency noted that “Centene is among the most vulnerable of its peers to the possible expiration of the enhanced ACA subsidies at year-end 2025 [and the OBBBA].” The CreditWatch placement reflects the potential for a one-notch downgrade.

On July 15, Moody’s changed its outlook to negative from stable.

Centene’s debt to capitalization ratio was 39% as of June 30. S&P’s financial leverage threshold for downgrade is 40%, and Moody’s is 45%.

The company’s medical costs as a percentage of revenue have increased:

Healthcare Staffing Downgrades Due to Lower Nurse Staffing Demand

On May 27, Moody’s downgraded AMN Healthcare Inc.’s corporate family rating, or CFR, to Ba3 from Ba2, its probability of default rating to Ba3-PD from Ba2-PD, and the ratings on the company’s senior unsecured notes to B1 from Ba3. Moody’s also changed the outlook to negative from stable. The company’s speculative grade liquidity rating of SGL-1 is unchanged.

The downgrade of AMN’s CFR to Ba3 reflects “deteriorating credit metrics as revenue continues [its] structural decline due to lower demand in the nurse staffing industry,” resulting in compression of the bill-pay spread.

AMN Healthcare Services Inc. disclosed that on Nov. 5, 2024, the company and its wholly owned subsidiary, AMN Healthcare Inc., entered into an amendment to the existing credit agreement dated as of Feb. 9, 2018, with lenders and Truist Bank, as administrative agent.

Pursuant to the amendment, the maximum consolidated net leverage ratio was increased to 4.5x for the period starting Dec. 31, 2024, through Dec. 31, 2025.

After Dec. 31, 2025, the maximum consolidated net leverage ratio will revert to 4x.

AMN Healthcare’s $350 million senior unsecured notes due 2029 are indicated at 93.25/94, translating to a yield to maturity of about 6%. The company’s notes due 2027 are yielding about 5.2%. AMN’s trailing 12-month unlevered FCF as a percentage of debt was 33.5% of total debt, so even though the yield on the unsecured notes suggests that interest expenses will increase if and when the company refinances its debt, AMN should still be able to service debt.

Ingenovis and Medical Solutions were both downgraded on June 3, with Ingenovis’ first lien bank credit facilities downgraded to Caa3 from Caa1 and Medical Solutions downgraded to Caa2 from Caa1.

Moody’s said Ingenovis’ ratings downgrade reflects “deteriorating credit metrics as revenue continues to face headwinds due to the structural shift in the nurse staffing industry resulting in lower demand and reduced contract labor spend by healthcare providers.”

Medical Solutions was downgraded for a similar reason.

On May 14, Ingenovis disclosed to lenders that it closed an $85 million accounts receivable facility to boost liquidity, according to sources.

The five-year facility, extended by Sixth Street, bears a cash interest of SOFR+600 bps with a minimum utilization rate of 50%, the sources said. The initial borrowing base is $67 million, according to Moody’s.

Medical Solutions agreed with lenders to extend the maturity of its $375 million AR securitization facility to Sept. 1, 2026, from April 1, 2026, according to sources.

Ingenovis’ term loan B due 2028 is indicated at 38/39 as of Sept. 9, down from the low 80s in mid-August 2024. Medical Solutions’ term loan due 2028 is indicated at 55/60 as of Sept. 9, down from the mid-70s in mid-August 2024 but up from the low 50s in mid-July.

Carestream Health 1L Term Loan Downgraded to Caa2

Moody’s downgraded Carestream Health’s first lien senior secured term loan to Caa2 from Caa1, reflecting “deterioration in Carestream’s credit metrics, driven by a decline in revenues and earnings in the first quarter of 2025.”

In 2007, Onex Corp. purchased Carestream Health for $2.35 billion.

Premier Dental Services’ First-Out TL Downgraded to B3, Second-Out to Caa3

Moody’s downgraded Premier Dental Services’ first out term loans to B3 from B2 and its senior secured second-out term loans and senior secured second-out revolving credit facility to Caa3 from Caa2, reflecting “a significant deterioration in operating performance and liquidity.”

Moody’s said it “expect[s] the financial leverage to remain above 10x in the next 12-18 months, making the capital structure unsustainable.”

Premier is grappling with relatively low liquidity after a $30 million injection of new money from its sponsor, New Mountain Capital, last October and an LME last May.

The company’s $553 million SOFR+650 bps second-out exchange paper due 2028 is indicated at 35/40 as of Sept. 9.

Neogen Unsecured Notes Downgraded to B+ From BB on Integration, Macro Concerns

S&P downgraded Neogen’s issue-level rating on its unsecured notes to B+ from BB, citing “further challenges with the integration of the 3M food safety business and continued macroeconomic challenges, including global trade uncertainties and heightened risk of inflation, could sustain leverage above 4x in 2026 and onward.”

Neogen’s $350 million 8.625% senior unsecured notes due 2030 are indicated at 104.75/106.75 as of Sept. 9. The notes are callable on July 20, 2027, at 102.156, according to Solve.

TeamHealth Holdings Upgraded Amid Proposed Refi, but OBBBA Presents Risk

On July 23, Moody’s upgraded TeamHealth, a provider of physician staffing and administrative services to hospitals and other healthcare providers in the United States, to B3 from Caa1 and assigned a Caa1 rating to TeamHealth’s new senior secured term loan and bonds due 2028.

Moody’s said the upgrade reflects “a decreased likelihood of default, driven by the company’s proposed refinancing of its existing Term Loan B due 2027 with new senior secured term loan due June 2028 and new senior secured bonds due June 2028.”

The ratings agency said TeamHealth also “benefited from a recovery in business volumes, internal cost rationalization, and the successful resolution of payment disputes with commercial health insurance companies.”

A June 18 report from the Niskanen Center noted that in fiscal year 2024, providers initiated 1.5 million billing disputes, more than 70x the predicted annual case load. About 85% of those disputes were decided in favor of the provider.

In February 2017, Blackstone alongside Caisse de dépôt et placement du Québec, the Public Sector Pension Investment Board and the National Pension Service of Korea purchased TeamHealth for about $6.1 billion, or 11.5x TTM EBITDA at the time of purchase. The equity commitment was $2.7 billion.

TeamHealth is one of the largest providers of outsourced physicians and administrative services to emergency departments, or EDs. ED volumes may spike as individuals delay care, creating more demand for outsourced services.

Net revenue from TeamHealth’s ED service line accounted for 58% of its FY 2024 revenue.

Uninsured patients are projected to rise by 16 million from 2026 to 2034. The uninsured rate was 8.2% in 2024, with 27 million people uninsured, compared with 9.7%, or 32 million people, in 2020. Before implementation of the ACA in 2010, the uninsured rate was 17.8%

Since uninsured ED patients must be treated, a spike in uninsured patients means companies such as TeamHealth would have higher levels of uncompensated care, resulting in lower margins and higher AR balances.

July was a busy month for debt capital markets: