7 systems with recently affirmed credit ratings

Below is a summary of hospitals and health systems that have recently received affirmations of existing credit ratings. Some of these have not been reported on previously.

  1. New York City-based cancer specialist Memorial Sloan Kettering Cancer Center was affirmed by Fitch Ratings May 22 at “AA” with a stable outlook both for its default rating and on a series of bonds totaling approximately $2.6 billion.
  2. Baltimore-based University of Maryland Medical System had an “A” rating affirmed on a series of bonds May 19 amid its robust operating profile and status as a premier healthcare provider in Maryland, S&P Global said. The 12-hospital system reported an operating loss of $8.9 million for the nine months ending March 31.
  3. Oakland, Calif.-based Kaiser Permanente had its “AA” default rating and that on a series of bonds affirmed May 15 by Fitch as the system was able to maintain a strong financial profile even in the face of a challenging operating environment.
  4. Providence, R.I.-based Care New England has had its default rating and that on $135.8 million of bonds affirmed at “BB-,” Fitch Ratings said May 12. The system’s outlook remains negative.The ratings reflect Care New England’s “ongoing operational challenges and thin liquidity,” Fitch said. While operating performance is expected to improve, there remains a low cash position of concern, the note said.
  5. New Hyde Park, N.Y.-based Northwell Health had an “A-” rating affirmed on a series of bonds amid strong market share and robust financial performance, Fitch said April 28. The 21-hospital system had $15.6 billion revenues in 2022.
  6. While its relatively weaker operating performance may continue in the shorter term, Rochester, Minn.-based Mayo Clinic has had its long-term ratings affirmed because of its excellent reputation in overall health services, both S&P Global and Moody’s said.Mayo Clinic’s revenue bonds remain at “AA” with a stable outlook, S&P said. Mayo Clinic’s “Aa2” stable credit profile is characterized by its excellent reputations for clinical services, research and education, Moody’s said.
  7. Moody’s affirmed New York City-based Montefiore Health System‘s “Baa3” rating because of the 10-hospital system’s leading market share in the Bronx, its clinical expertise, and its flagship status as the primary teaching hospital for Albert Einstein College of Medicine.

24 health systems with strong finances

Here are 24 health systems with strong operational metrics and solid financial positions, according to reports from credit rating agencies Fitch Ratings, Moody’s Investors Service and S&P Global in 2023

Note: This is not an exhaustive list. Health system names were compiled from credit rating reports.

1. Atrium Health has an ‘AA-‘ and stable outlook with S&P Global. The Charlotte, N.C.-based system’s rating reflects a robust financial profile, growing geographic diversity and expectations that management will continue to deploy capital with discipline. 

2. Berkshire Health has an “AA-” rating and stable outlook with Fitch. The Pittsfield, Mass.-based system has a strong financial profile, solid liquidity and modest leverage, according to Fitch. 

3. CaroMont Health has an “AA-” rating and stable outlook with S&P Global. The Gastonia, N.C.-based system has a healthy financial profile and robust market share in a competitive region.  

4. CentraCare has an “AA-” rating and stable outlook with Fitch. The St. Cloud, Minn.-based system has a leading market position, and its management’s focus on addressing workforce pressures, patient access and capacity constraints will improve operating margins over the medium term, Fitch said. 

5. Children’s Minnesota has an “AA” rating and stable outlook with Fitch. The Minneapolis-based system’s broad reach within the region continues to support long-term sustainability as a market leader and preferred provider for children’s health care, Fitch said. 

6. Cone Health has an “AA” rating and stable outlook with Fitch. The rating reflects the expectation that the Greensboro, N.C.-based system will gradually return to stronger results in the medium term, the rating agency said.

7. El Camino Health has an “AA-” rating and stable outlook with Fitch. The Mountain View, Calif.-based system has a history of generating double-digit operating EBITDA margins, driven by a solid market position that features strong demographics and a very healthy payer mix, Fitch said. 

8. Harris Health System has an “AA” rating and stable outlook with Fitch. The Houston-based system has a “very strong” revenue defensibility, primarily based on the district’s significant taxing margin that provides support for operations and debt service, Fitch said.

9. Hoag Memorial Hospital Presbyterian has an “AA” rating and stable outlook with Fitch. The Newport Beach, Calif.-based system’s rating is supported by a leading market position in its immediate area and very strong financial profile, Fitch said.  

10. Inspira Health has an “AA-” rating and stable outlook with Fitch. The Mullica Hill, N.J.-based system’s rating reflects its leading market position in a stable service area and a large medical staff supported by a growing residency program, Fitch said. 

11. Mayo Clinic has an “Aa2” rating and stable outlook with Moody’s. The Rochester, Minn.-based system’s credit profile characterized by its excellent reputations for clinical services, research and education, Moody’s said.

12. McLaren Health Care has an “AA-” rating and stable outlook with Fitch. The Grand Blanc, Mich.-based system has a leading market position over a broad service area covering much of Michigan and a track-record of profitability despite sector-wide market challenges in recent years, Fitch said. 

13. Novant Health has an “AA-” rating and stable outlook with Fitch. The Winston-Salem, N.C.-based system has a highly competitive market share in three separate North Carolina markets, Fitch said, including a leading position in Winston-Salem (46.8 percent) and second only to Atrium Health in the Charlotte area.  

14. NYC Health + Hospitals has an “AA-” rating with Fitch. The New York City system is the largest municipal health system in the country, serving more than 1 million New Yorkers annually in more than 70 patient locations across the city, including 11 hospitals, and employs more than 43,000 people. 

15. Orlando (Fla.) Health has an “AA-” and stable outlook with Fitch. The system’s upgrade from “A+” reflects the continued strength of the health system’s operating performance, growth in unrestricted liquidity and excellent market position in a demographically favorable market, Fitch said.  

16. Rush System for Health has an “AA-” and stable outlook with Fitch. The Chicago-based system has a strong financial profile despite ongoing labor issues and inflationary pressures, Fitch said. 

17. Saint Francis Healthcare System has an “AA” rating and stable outlook with Fitch. The Cape Girardeau, Mo.-based system enjoys robust operational performance and a strong local market share as well as manageable capital plans, Fitch said. 

18. Salem (Ore.) Health has an “AA-” rating and stable outlook with Fitch. The system has a “very strong” financial profile and a leading market share position, Fitch said. 

19. Stanford Health Care has an “AA” rating and stable outlook with Fitch. The Palo Alto, Calif.-based system’s rating is supported by its extensive clinical reach in the greater San Francisco and Central Valley regions and nationwide/worldwide destination position for extremely high-acuity services, Fitch said. 

20. SSM Health has an “AA-” rating and stable outlook with Fitch. The St. Louis-based system has a strong financial profile, multi-state presence and scale, with solid revenue diversity, Fitch said.  

21. UCHealth has an “AA” rating and stable outlook with Fitch. The Aurora, Colo.-based system’s margins are expected to remain robust, and the operating risk assessment remains strong, Fitch said.  

22. University of Kansas Health System has an “AA-” rating and stable outlook with S&P Global. The Kansas City-based system has a solid market presence, good financial profile and solid management team, though some balance sheet figures remain relatively weak to peers, the rating agency said. 

23. WellSpan Health has an “Aa3” rating and stable outlook with Moody’s. The York, Pa.-based system has a distinctly leading market position across several contiguous counties in central Pennsylvania, and management’s financial stewardship and savings initiatives will continue to support sound operating cash flow margins when compared to peers, Moody’s said.

24. Willis-Knighton Health System has an “AA-” rating and stable outlook with Fitch. The Shreveport, La.-based system has a “dominant inpatient market position” and is well positioned to manage operating pressures, Fitch said.

Financial Reserves as a Buffer for Disruptions in Operation and Investment Income

For the first time in recent history, we saw all three
functions of the not-for-profit healthcare system’s
financial structure suffer significant and sustained
dislocation over the course of the year 2022
(Figure above).

The headwinds disrupting these functions
are carrying over into 2023, and it is uncertain how
long they will continue to erode the operating and
financial performance of not-for-profit hospitals
and health systems.

Ÿ The Operating Function is challenged by elevated
expenses, uncertain recovery of service volumes, and
an escalating and diversified competitive environment.

Ÿ The Finance Function is challenged by a more
difficult credit environment (all three rating agencies

now have a negative perspective on the not-forprofit healthcare sector), rising rates for debt, and
a diminished investor appetite for new healthcare
debt issuance. Total healthcare debt issuance in
2022 was $28 billion, down sharply from a trailing
two-year average of $46 billion.

Ÿ The Investment Function is challenged by volatility and
heightened risk in markets concerned with the Federal
Reserve’s tightening of monetary policy and the
prospect of a recession. The S&P 500—a major stock
index—was down almost 20% in 2022. Investments
had served as a “resiliency anchor” during the first
two years of the pandemic; their ability to continue
to serve that function is now in question.

A significant factor in Operating Function challenges is
both increases in the cost of labor and staffing
shortages that are forcing many organizations to
run at less than full capacity. In Kaufman Hall’s 2022
State of Healthcare Performance Improvement Survey, for
example, 67% of respondents had seen year-over-year
increases of more than 10% for clinical staff wages,
and 66% reported that they had run their facilities at
less-than-full capacity because of staffing shortages.

These are long-term challenges,

dependent in part on
increasing the pipeline of new talent entering healthcare
professions, and they will not be quickly resolved.
Recovery of returns from the Investment Function
is similarly uncertain. Ideally, not-for-profit health
systems can maintain a one-way flow of funds into
the Investment Function, continuing to build the
basis that generates returns. Organizations must now
contemplate flows in the other direction to access

funds needed to cover operating losses, which in
many cases would involve selling invested assets at a
loss in a down market and reducing the basis available
to generate returns when markets recover.

The current situation demonstrates why financial
reserves are so important:

many not-for-profit
hospitals and health systems will have to rely on
them to cover losses until they can reach a point
where operations and markets have stabilized, or
they have been able to adjust their business to a
new, lower margin environment. As noted above,
relief funding and the MAAP program helped bolster
financial reserves after the initial shock of the
pandemic. As the impact of relief funding wanes
and organizations repay remaining balances under
the MAAP program, Days Cash on Hand has begun
to shrink, and the need to cover operating losses is
hastening this decline. From its highest

point in 2021, Days Cash on Hand had decreased, as
of September 2022, by:

Ÿ 29% at the 75th percentile, declining from 302 to 216
DCOH (a drop of 86 days)

Ÿ 28% at the 50th percentile, declining from 202 to 147
DCOH (a drop of 55 days)

Ÿ 49% at the 25th percentile, declining from 67 to 34
DCOH (a drop of 33 days)

Financial reserves are playing the role
for which they were intended; the only
question is whether enough not-for-profit
hospitals and health systems have built
sufficient reserves to carry them through
what is likely to be a protracted period of
recovery from the pandemic.


All three functions of the not-for-profit healthcare
system’s financial structure—operations, finance,
and investments—suffered significant and
sustained dislocation over the course of 2022.

Ÿ These headwinds will continue to challenge not-forprofit

hospitals and health systems well into 2023.

Ÿ Days Cash on Hand is showing a steady decline, as
the impact of relief funding recedes and the need
to cover operating losses persists.

Ÿ Financial reserves are playing a critical role in
covering operating losses as hospitals and health
systems struggle to stabilize their operational and
financial performance.


Not-for-profit hospitals and health systems serve
many community needs. They provide patients
access to healthcare when and where they need it.
They invest in new technologies and treatments that
offer patients and their families lifesaving advances
in care. They offer career opportunities to a broad
range of highly skilled professionals, supporting the
economic health of the communities they serve.

These services and investments are expensive and
cannot be covered solely by the revenue received
from providing care to patients.

Strong financial reserves are the foundation of good
financial stewardship for not-for-profit hospitals and
health systems.

Financial reserves help fund needed
investments in facilities and technology, improve an
organization’s debt capacity, enable better access to
capital at more affordable interest rates, and provide a
critical resource to meet expenses when organizations
need to bridge periods of operational disruption or
financial distress.
Many hospitals and health systems today are relying
on the strength of their reserves to navigate a difficult

environment; without these reserves, they would
not be able to meet their expenses and would be at
risk of closure.

Financial reserves, in other words,
are serving the very purpose for which they are
intended—ensuring that hospitals and health systems
can continue to serve their communities in the face of
challenging operational and financial headwinds.

When these headwinds have subsided, rebuilding these
reserves should be a top priority to ensure that our
not-for-profit hospitals and health systems can remain
a vital resource for the communities they serve.

Financial Reserves and Credit Management

For large capital projects—construction of a new cancer
treatment center, for example, or replacement of an
aging facility—issuance of municipal debt is one of the
most affordable ways for not-for-profit hospitals and
health system to finance the project

The affordability of that debt is, however, partly contingent on the
organization’s ability to maintain a strong credit rating,
and financial reserves—again measured as Days Cash on
Hand—are a significant component of that credit rating.

There are two basic forms of municipal debt:

Ÿ General obligation bonds are backed by the full
taxing power of the issuing municipal authority and
are considered relatively low risk. Hospitals that are
owned by a city or county can be funded by general
obligation bonds, although there are practical
limitations on their ability to issue these bonds,
including in many instances the need to obtain voter
or county commissioner approval. Organizations

without municipal ownership—including most
not-for-profit hospitals and health systems—
cannot issue general obligation bonds.

Ÿ Revenue-backed municipal bonds are backed by
the ability of the organization borrowing the debt
to meet its obligation to make principal and interest
payments through the revenue it generates over the
life of the bond. Because revenues can be disrupted
by any range of factors, revenue-backed bonds are
higher risk for investors. Most healthcare bonds
are revenue-backed municipal bonds.

When determining whether to invest in revenue-backed
municipal healthcare bonds, investors will look to the
credit rating of the hospital or health system that is
borrowing the debt. Credit ratings—issued by one or
more of the three major credit rating agencies (Fitch
Ratings, Moody’s Investors Service, and S&P Global
Ratings)—provide an assessment of the probability

that the hospital or health system will be able to meet
the terms of the debt obligation. These ratings are
tiered. A credit rating in the AA tier is better than a credit
rating in the A tier, which is better than a rating in the
BBB tier. Ratings below the BBB tier are considered sub-investment grade.

Organizations with a sub-investment
grade rating can still access various forms of debt,
but the amount of debt they can access generally will
be lower, the cost of the debt will be higher, and the
covenants that lenders require will be more stringent
than for investment-grade rated organizations.

Financial reserves and credit ratings

Days Cash on Hand is one of the most important factors
credit rating agencies use because it is an indicator
of how long the rated organization could withstand
serious disruption to its operations and cashflow.
The rating agencies issue median values for the various
metrics they use to determine credit ratings. Median

values for Days Cash on Hand increased significantly
across most rating categories for all three agencies
in 2020 and 2021; this reflects the temporary inflow
of pandemic relief funding through, for example,
the Coronavirus Aid, Relief, and Economic Security
(CARES) Act.

We anticipate these medians will move
closer to pre-pandemic levels as relief funds are
exhausted and hospitals repay remaining balances
on Medicare’s COVID-19 Accelerated and Advanced
Payment (MAAP) program funds. But even before
the pandemic, organizations in 2019 had a median
Days Cash on Hand
of 276 to 289 days at the AA level,
173 to 219 days at the A level, and 140 to 163 days at
the BBB level.

In other words, the Days Cash on Hand
benchmark for organizations seeking to maintain an
investment-grade rating would be well over 100 Days
Cash on Hand, and well over 200 Days Cash on Hand for
organizations seeking to achieve a higher rating level.
Again, these reserves are proportionate to the operating
expenses of the individual hospital or health system.

Impact of credit ratings on access to capital

Organizations that can achieve a higher rating can
also borrow money at more affordable interest
rates. Figure 3 shows average interest rates for
municipal bonds across a range of maturities as of
mid-December 2022 (maturity is the term in years
for repayment of the bond at the time the bond is
issued). Lower-risk general obligation municipal bonds
are shown as the baseline, with lines for AA, A, and
BBB rated healthcare revenue-backed bonds above
it. As a reminder, most hospitals and health systems
cannot borrow money using general obligation bonds;
instead, they use higher-risk revenue-backed bonds
Because revenue-backed bonds are a higher risk for
investors than tax-based general obligation bonds,

even hospitals and health systems with a strong
AA credit rating will pay a higher interest rate than
would a city or county that could back repayment of
the bond with tax revenues (see the line for AA rated
Healthcare Revenue Bonds compared to the line
for AAA rated General Obligation bonds). But there
is also a significant gap between the interest rate a
hospital with an AA credit rating would pay compared
to the interest rate available to a hospital with a lower
BBB rating
. Here, the difference is approximately
three-fourths of a full percentage point. When the
amount borrowed for a major new hospital project
can run into the hundreds of millions of dollars,
that difference represents significant savings for
organizations with a higher credit rating.

Financial reserves and debt capacity

Financial reserves and the funds they generate—
including investment income—also help define an
organization’s debt capacity: essentially, the amount of
debt an organization can assume without jeopardizing
its current credit rating. There are two key ratios here:

Ÿ The first is total unrestricted cash and investments
to debt.
In general, the more favorable that ratio is,
the more latitude a hospital or health system has to
take on additional debt, especially if the organization
is toward the middle to top end of its rating tier.

Ÿ The second is the debt service coverage ratio,
which measures the organization’s ability to
make principal and interest payments with funds
derived from both operating and non-operating
(e.g., investment income) activity. A higher ratio
here means the organization has more funds
available to service debt.

The ability to assume additional debt is an important
safety valve
if, for example, an organization needs to
mitigate poor financial performance to fund ongoing
capital needs or strategic initiatives.


Not-for-profit hospitals and health systems often
borrow debt through revenue-backed municipal
bonds, meaning that the debt obligations will be
met by the revenue the organization generates
over the life of the bond.

Ÿ Because revenue-backed bonds are higher
risk than general obligation bonds
backed by a
municipality’s taxing authority (revenues can
be disrupted), investors seek assurance that an
organization will be able to meet its obligations.

Ÿ Credit ratings offer investors an assessment of
an organization’s current and near-term ability to
meet these obligations.

Ÿ Days Cash on Hand is an important metric in
assessing the organization’s credit rating, and a
higher rating generally requires a higher number of
Days Cash on Hand.

Ÿ A higher credit rating allows organizations to
borrow money at more affordable interest rates.

Ÿ A higher level of financial reserves and investment
income in relation to existing debt obligations also
increases an organization’s debt capacity, creating
an important safety valve if an organization has
to borrow money to mitigate poor operating or
investment performance.

13 hospital and health systems hit with credit downgrades, revisions

Here is a summary of recent credit downgrades and outlook revisions for hospitals and health systems going back to the most recent major roundup March 16.

The various downgrades reflect continued operating challenges many nonprofit systems are facing and will likely continue to deal with for some years to come. The most recent downgrades and revisions, which have not been included in any more recent roundups, are listed first.

Baptist Health Care (Pensacola, Fla.): 

BHC had the rating downgraded on a series of its bonds as a reflection of “pressured operating performance and cash flow,” S&P Global said April 19.

As well as typical industry pressures of inflation and labor expenses, the three-hospital system may face further challenge because of a replacement project for its flagship Baptist Hospital that is due to be completed in late 2023.

Beacon Health (South Bend, Ind.): 

Beacon Health System had its outlook revised to negative from stable on “AA-” rated bonds it holds, S&P Global said April 14.

The move reflects weaker operating results and an expectation of increased debt over the near term.

Kuakini Health System (Honolulu): 

Kuakini Health System, which has a “CCC” long-term rating, has been placed on CreditWatch with negative implications, S&P Global said April 14.

The move reflects the system’s sustained operating challenges with no foreseeable major changes and questions about its long-term viability, the agency said, describing the system’s “precarious financial position.”

Baystate Health (Springfield, Mass.): 

Baystate Health had ratings downgraded on specific bonds related to its flagship medical center, S&P Global said April 12.

While ratings were affirmed on other debt, those on others specific to the 780-bed Baystate Medical Center were downgraded to “A” from “A+” as the system’s operating challenges continue into 2023, the agency said.

Penn State Health (Hershey, Pa.): 

Higher-than-expected operating losses have led to Penn State Health being downgraded on a series of bonds from “A+” to “A,” S&P Global said April 6.

Original budgets for the first part of fiscal 2023 targeted a slightly positive full-year operating margin, but data shows a $75 million lower-than-forecasted figure, S&P Global said. Operating income showed a loss of $154.5 million for the six months ending Dec. 31 compared with a $48.8 million loss in all of fiscal 2022.

Legacy Health (Portland, Ore.): 

Legacy Health had its outlook revised to negative from stable amid expectations the eight-hospital system will continue to experience difficult operating conditions and concern it will continue to fail to meet debt obligations, Moody’s said April 5.

The rating on its revenue bonds was affirmed at “A1.” Total debt stands at $738 million.

Providence (Renton, Wash.): 

The 51-hospital system recorded the first of three downgrades in the space of a few weeks March 17 when Fitch Ratings attached an “A” grade to both the system’s default rating and a series of bonds worth approximately $7.4 billion. The outlook for the system is negative due to its higher-than-average debt loads, Fitch said. 

S&P Global then downgraded Providence to the same notch from “A+” March 21 amid higher expenses and an expectation of only a multiyear process of recovery. The outlook for the system was also negative given the steep operating losses that need to be dealt with, S&P said.

Finally, Providence was downgraded by Moody’s on a series of bonds from “A1” to “A2.

Thomas Jefferson (Philadelphia): 

Thomas Jefferson University has undergone a credit downgrade with cash flow margins expected to stay low for “several years,” Moody’s said March 30.

The 18-hospital system, which also operates 10 colleges located primarily on two campuses in Philadelphia, is expected to stabilize its days of cash on hand to about 140, but debt will remain high, Moody’s said. The outlook is stable.

Oaklawn Hospital (Marshall, Mich.): 

The 68-bed community hospital was downgraded to “BBB-” from “BBB” as it reported operating losses due to higher expenses and length of patient stay, Fitch Ratings said March 29.

The downgrade refers both to its default rating and on bonds worth $63.5 million. The outlook is negative.

DCH Health (Tuscaloosa, Ala.): 

The three-hospital system saw its rating on a series of bonds lowered to “A-” from “A” as it continues to suffer operating losses, S&P Global said March 29.

The system’s “deeply negative underlying operations” are unlikely to lead to any substantial improvement in the near future, the agency said.

DCH Health operates a total of 510 staffed beds.

AU Health System (Augusta, Ga.): 

The system, which is being pursued by Marietta, Ga.-based Wellstar Health, was downgraded March 23 amid concern over negative cash flow and that it may breach covenant agreements later this year, Moody’s said.

The downgrade to “B2” from “Ba3” applies to revenue bonds the system holds. The outlook is negative.

PeaceHealth (Vancouver, Wash.): 

“Considerable operating stress” was the driver behind Fitch Ratings downgrading the 10-hospital system March 21.

The downgrade to “A+” from “AA-” applied to both the system’s default rating and on a series of bonds. The outlook is stable.

Management is targeting a return to profitability by fiscal 2026, Fitch noted.

Mercy Iowa City Hospital:

The hospital, part of Des Moines, Iowa-based MercyOne, was downgraded March 16 to “Caa1” from “B1” because of what Moody’s called “severe cash flow deterioration.” The “Caa1” categorization is seen as “substantial risk.”

PeaceHealth cuts 251 jobs

PeaceHealth has eliminated 251 caregiver roles across multiple locations, the Vancouver, Wash.-based health system said in a statement shared with Becker’s on April 26.

PeaceHealth is actively responding to the significant challenges faced by healthcare organizations across the U.S. Comprehensive plans are already underway to recruit additional nurses, ensure patients can return home as quickly as possible and grow the services we know our community members need,” the statement read. 

“As always, we are also adjusting operations and services to reflect changes in our communities and ensure we are being responsible to our healing mission into the future.”

PeaceHealth said affected roles include 121 from Shared Services, which supports its 16,000 caregivers in Washington, Oregon and Alaska. Shared Services include administrative services that support clinical caregivers such as human resources, information technology, marketing and communications, and finance.

The remaining affected roles are “relatively evenly spread across our three networks. In line with our value of respect, we offer comprehensive transitional support consistent with our policies and practices to all impacted caregivers,” the health system said.

PeaceHealth spokesperson Alison Taylor told Becker’s the health system anticipates many affected caregivers will be qualified for the nearly 1,300 open clinical roles across the organization.

In February, PeaceHealth reported a loss of $90.8 million in the six months ending Dec. 31, 2022. The health system was also downgraded in March by Fitch Ratings, which cited the organization’s “considerable operating stress.”

PeaceHealth operates 10 hospitals across Alaska, Oregon and Washington.

Recalibrating a Responsive Capital Formation Program

Current Funding Environment

Wednesday’s inflation print showed a March increase of 0.1% versus February and a year-over-year increase of 5.0%, both of which were better than expected. Markets rallied following the news, at least until the specter of recession caused a reversal of equity gains. The game remains the same: markets want easy money and inflation plus unemployment plus recession equals Fed policy and interest rate levels. Memories of the long 1970s slog through declining and then accelerating inflation levels suggest that it’s too early to declare victory (5.00% is still a long way from the Fed’s 2.00% target range). Nevertheless, hopes increased that the Fed may truly be at or very near the end of its tightening cycle.

Unsustainable Trends

The web version of The Wall Street Journal got rid of its special section on the “2023 Bank Turmoil,” which is a sign that we’re past the worst of this chapter in the Dickensian saga in which our financial system hero navigates all sorts of unfortunate characters and events in search of a new “normal.” Banking distrust ripples continue, with various clients sharing the work they are doing to peel back layers of counterparty risk to understand whether threats loom in downstream financial dependencies. Our regulatory infrastructure has shown itself to be a mile wide and an inch deep, which fuels the kind of skepticism about the reliability of designated watchdogs that leads to self-directed risk assessments.

At one level, this is a helpful and important exercise. The credit and financing structure of any complex healthcare organization is just another supply chain, and it is good to understand how yours works and whether there are vulnerabilities that should be investigated. But it is equally important to assess whether the progression of COVID to inflation to Silicon Valley Bank has caused your organization to drift from risk management into retrenchment. Organizations naturally migrate along a risk continuum as they shift between prioritizing returns or resiliency. The important question isn’t which of these bookends is right, but rather what shapes the migration; the defining event is the journey, and

the critical Board and C-suite conversation is whether your risk management program is enabling or constraining future growth.

We continue to monitor the extraordinary decline in not-for-profit healthcare debt issuance. Sources we rely on show healthcare public debt issuance through Q1 2023 down almost 70% versus Q1 2022. Similar data sources aren’t available, but anecdotal input from our team suggests a comparable drop-off in healthcare real estate as well as alternative funding channels. At the same time, although margins have recently improved, operating cash flow across the sector has been weak over the past 12-18 months. If capital formation from internal and external sources is a sign of vibrancy, healthcare is listless.

The primary culprit isn’t rates; the sector has raised capital in much higher rate environments with fewer financing channels (including most of the pre-2008 era). Instead, the rationale most frequently advanced is concern about the reaction from key credit market constituents during this time of unprecedented operating disruption. Of course, this makes sense, but sitting underneath this basic rationale is the question of what might be called “capital deployment conviction.” Long experience confirms that organizations armed with a growth thesis they believe in aren’t shy about “selling” their story to rating agencies and investors and are willing to suffer adverse outcomes on rates, ratings, or covenants, if that is the price of growth. This isn’t happening right now, which introduces the troubling idea that issuance trends are about much more than credit management.

No matter the root cause, recent capital formation is not sustainable.

Good risk management leads to caution in challenging times, but being too careful elevates the probability that temporary problems become permanent. $2.8 billion in quarterly external capital formation ($11.2 billion annualized—pause and let that annualized amount sink in) is not sufficient to maintain the not-for-profit healthcare sector’s care delivery infrastructure, especially when internal capital generation is equally anemic. But introduce any competitive paradigm and the underinvestment that accompanies this level of capital formation becomes a harbinger of hard times to come. To riff on Aristotle, capitalism abhors a vacuum, and organizations looking to avoid rating pressure today may be elevating the risk of competitive pressure tomorrow; and it is easier to cope with and eventually recover from rating pressure than it is to confront the long-term consequences of well-capitalized and aggressive competitors. Retrenchment might be the right risk management choice in times of crisis, but once that crisis moderates that same strategy can quickly become a risk driver.

Machiavelli, Sun-Tzu, Napoleon, George Washington, and other great tacticians all advanced some variation of the idea that “the best defense is a good offense.” In the world of risk response, this means that the better choice isn’t to de-risk and hibernate but rather to continuously reposition available risk capacity so that you keep the organization moving forward. Star Trek’s philosopher-king Captain James Tiberius Kirk captured the sentiment best when he said, “the best defense is a good offense, and I intend to start offending right now.”

While getting back on the capital horse is important, clearing rates, relative value ratios, risk premia, and flexibility drivers have all reset over the past 12-18 months, so recalibrating a good capital formation program requires reassessment and may lead to very different tactics.

This means that a critical step is to get organized around funding parameters:

debt versus real estate versus other channels; MTI versus non-MTI; tax-exempt versus taxable; public versus private; fixed versus floating. The other important part of this is gaining conviction about capital structure risk versus flexibility: do you want to retain flexibility at the “cost” of incurring the market risk embedded in short-tenor or floating rate structures or do you want to sell flexibility in exchange for capital structure risk reduction?

A new normal for hospital margins?


Using data from Kaufman Hall’s National Hospital Flash Report, as well as publicly available investor reports for some of the nation’s largest nonprofit health systems, the graphic above takes stock of the current state of health system margins. 

The median US hospital has now maintained a negative operating margin for a full year. Some good news may be on the horizon, as the picture is slightly less gloomy than a year ago, with year-over-year revenues increasing seven points more than total expenses. 

However, the external conditions suppressing operating margins aren’t expected to abate, and many large health systems are still struggling.

Among large national non-profits Ascension, CommonSpirit Health, Providence, and Trinity Health, operating income in FY 2022 decreased 180 percent on average, and investment returns fell by 150 percent on average, compared to the year prior.

While health systems’ drop in investment returns mirrors the overall stock market downturn, and is largely comprised of unrealized returns, systems may not be able to rely on investment income to make up for ongoing operating losses.  

10 health systems and their debt levels

A number of healthcare and hospital systems detailed their levels of debt when reporting recent financial results. Here is a summary of some of those systems’ reports, including debt totals calculated by ratings agencies:

  1. Augusta, Ga.-based AU Health, which comprises a 478-bed adult hospital and 154-bed children’s hospital and serves as the academic medical center for the Medical College of Georgia, had approximately $327 million of debt in fiscal 2022. The system, which  became affiliated with Atlanta-based Wellstar Health System on March 31, was  downgraded to “B2” from “Ba3” with a negative outlook, Moody’s said March 23.
  2. Salt Lake City-based Intermountain Health had long-term debt of $3.6 billion as of Dec. 31. Overall income for the 33-hospital system in 2022 totaled $2.6 billion, boosted by the affiliation effective April 1 of SCL Health, which contributed $4 billion.
  3. Credit rating agency Moody’s is revising Springfield Ill.-based Memorial Health System‘s outlook from stable to negative as the health system ended fiscal year 2022 with $343 million in outstanding debt. Moody’s expects Memorial to stabilize in 2023 but not reach historical levels until 2025, according to the March 24 report.
  4. New York City-based NYU Langone Hospitals, which has total debt outstanding of approximately $3.1 billion, had its outlook revised to positive from stable amid a “very good operating performance” that has helped lead to improved days of cash on hand, Moody’s said. NYU Langone consists of five inpatient locations in New York City and on Long Island as well as numerous ambulatory facilities in the five boroughs, Long Island, New Jersey and Florida.
  5. Bellevue, Wash.-based Overlake Hospital Medical Center was downgraded on a series of bonds as the 310-bed hospital faces ongoing labor and inflationary challenges and the possibility of not meeting its debt coverage requirements, Moody’s said March 9. The hospital, which also operates several outpatient clinics and physician offices in its service area, has $295 million of outstanding debt.
  6. Renton, Wash.-based Providence, has about $7.4 billion worth of debt. The 51-hospital system, which reported a fiscal 2022 operating loss of $1.7 billion, was downgraded as it continues to deal with ongoing operational challenges, Fitch Ratings said March 17, the first of three downgrades Providence suffered in the space of weeks. The Fitch downgrade to “A” from “A+” applies both to the system’s default rating and on the $7.4 billion in debt.
  7. Lansing, Mich.-based Sparrow Health had long-term debt of $353.5 million as of Dec. 31, S&P Global said. Sparrow Health has had a series of bonds it holds placed on credit watch amid concern over the eventual outcome of a planned merger with Ann Arbor-based University of Michigan Health, S&P Global said Feb. 16. The $7 billion merger was eventually approved April 3.
  8. St. Louis-based SSM Health, which had approximately $2.6 billion of total debt outstanding at the end of fiscal 2022, reported an operating loss of $248.9 million after its expenses increased 7.6 percent over the previous year. SSM Health had an “AA-” rating affirmed on a series of bonds it holds as the 23-hospital system dipped in operating income in fiscal 2022 after “several years of consistently solid performance,” according to a March 24 report from Fitch Ratings.
  9. Philadelphia-based Temple University Health had $395.6 million long-term debt as of Dec. 31. The system’s outlook was revised to stable from positive following recent results S&P Global described as “very challenged” and “deeply negative.” The referenced results are interim fiscal 2023 figures that contrast significantly with expectations, S&P said March 15. Temple Health is in danger of not meeting debt coverage requirements as a result.
  10. Dallas-based Tenet Healthcare reported $14.9 billion of long-term debt when it revealed net income of $410 million for the year Feb. 9. Tenet had its default rating affirmed at “B+” as the 61-hospital system’s operating income remains resilient in the face of industry pressures and debt levels stay manageable, Fitch Ratings said March 27.

Providence endures another credit downgrade

Renton, Wash.-based Providence suffered its third credit downgrade in less than three weeks when Moody’s revised a rating on bonds the 51-hospital system holds to “A2” from “A1.”

Such a rating reflects an expectation margins will remain weak in 2023. The outlook is negative.

The move follows similar actions by Fitch Ratings March 17 and S&P Global March 21 amid an anticipated multiyear process of financial recovery.

Capital expenditure for Providence is expected to be restricted after the completion of a couple of major projects this year to effect “margin recovery,” Moody’s said.

Providence reported a $1.7 billion operating loss in 2022.