Provider organizations face increased financial pressure as reimbursement models shift in the value-based care era. To keep pace with these trends, Fitch Ratings is updating its rating criteria for nonprofit hospitals and health systems.
The agency’s proposed rating criteria changes, which also apply to tax-supported hospital districts, include introduction of revenue defensibility, operating risk and financial profile rating factors as well as individual assessments for each of those factors. Fitch said risk factors such as debt structure will also play a role in rating assignments.
The new rating factors assess how prepared the organization is to handle cost pressures and the organization’s operating cost flexibility, among other things, according to Fitch.
“The rating criteria needed a refresh and forces us to think about what’s going on right now in healthcare,” says Kevin Holloran, a Dallas-based senior director with Fitch.
The rating agency does not expect to see widespread rating changes as a result of the proposed rating criteria changes. In fact, Fitch projects the proposed changes will affect less than 15 percent of the ratings covered by the criteria.
Fitch took feedback on its initial draft of proposed rating criteria changes up until Oct. 20. It will now incorporate feedback into a final draft and anticipates adopting the proposed rating criteria changes in December.
As part of the proposed rating criteria changes, the rating agency is launching the Fitch Analytical Sensitivity Tool, or FAST. The interactive tool measures the financial flexibility of healthcare organizations in various hypothetical stress scenarios. For instance, the tool can assess how changes in the overall U.S. economy/market cycle, such as a drop in property values or the gross domestic product, may affect a hospital’s financial picture. Additionally, the tool can assess a hospital’s potential sensitivity to margin decline in various stress scenarios such as issuing a significant amount of debt or facing increased market competition, according to Fitch.
“Ratings agencies are always accused of looking backward in the mirror, but we want [the organization] to look forward expressly. We thought we always did a good job with that, but there’s always room for improvement,” says Mr. Holloran.
FAST can also model growth and expense rates and subject them to stress or an unexpected negative event to see if a hospital’s credit remains stable, according to Mr. Holloran.
He explains, this is “not a forecast, but a reasonable scenario based on our input combined with the credit, or input based on historical performance.” Mr. Holloran also notes the model informs ratings but does not drive them.
The public can now look at a mockup of the model here. Mr. Holloran says the model is built, but it does not include every credit rating yet. Fitch will continue to add to the tool over time.
Once the agency’s proposed rating criteria changes are fully adopted, the FAST model will allow hospitals to look forward and stress test a rating.
Hospitals “could use it for scenario building and give them a guide for the metrics they want to focus on,” Mr. Holloran says. “We can tell them this is the criteria we’re focusing on and this is how you stack up.”
He added, “It’s a powerful [data visualization] tool and really drives the conversation.”