Category Archives: Financial Ratios

67 financial benchmarks for health system executives

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35 financial benchmarks for healthcare executives | HENRY KOTULA

Health system leaders use benchmarking as a way to determine how their organizations stack up against both local and regional peers.

Below are 67 financial benchmarks, including key ratios for health systems, as well as revenue and margin metrics, broken down by rating category.

Key balance sheet metrics, ratios:

Source: Fitch Ratings’ “2021 Median Ratios: Not-for-Profit Hospitals and Healthcare Systems” report. It was released Aug. 3. 

1. Cash on hand: 255 days

2. Accounts receivable: 44.6 days

3. Cushion ratio: 29x

4. Current liabilities: 95 days

5. Cash to debt: 169.9 percent

6. Cash to adjusted debt: 161.1 percent

7. Operating margin: 1.3 percent

8. Operating EBITDA margin: 6.7 percent

9. Excess margin: 3.1 percent

10. EBITDA margin: 8.5 percent

11. Net adjusted debt to adjusted EBITDA: -2.6 percent

12. Personnel costs as percent of total operating revenue: 55 percent

13. EBITDA debt service coverage: 3.9x

14. Operating EBITDA debt service coverage: 3.2x

15. Maximum annual debt service as percent of revenues: 2.2 percent

16. Debt to EBITDA ratio: 4.4x

17. Debt to capitalization: 35.2 percent

18. Average age of plant: 11.4 years

19. Capital expenditures as percent of depreciation expense: 110.1 percent

Margins, revenue financial benchmarks broken down by rating category: 

Source: S&P Global Ratings “U.S. Not-For-Profit Health Care System Median Financial Ratios — 2019 vs. 2021″ report.” The report was released Aug. 30.

“AA+” rating

20. Net patient service revenue: $4.16 billion

21. Total operating revenue: $4.43 billion

22. Operating margin: 4.5 percent

23. Operating EBIDA margin: 11.3 percent

24. Excess margin: 5.5 percent

25. EBIDA margin: 12.2 percent

“AA” rating

26. Net patient service revenue: $3.98 billion

27. Total operating revenue: $4.95 billion

28. Operating margin: 3.2 percent

29. Operating EBIDA margin: 8.3 percent

30. Excess margin: 5.8 percent

31. EBIDA margin: 10.7 percent

“AA-” rating

32. Net patient service revenue: $3.08 billion

33. Total operating revenue: $3.41 billion

34. Operating margin: 1.9 percent

35. Operating EBIDA margin: 7.1 percent

36. Excess margin: 4.1 percent

37. EBIDA margin: 9.2 percent

“A+” rating

38. Net patient service revenue: $2.26 billion

39. Total operating revenue: $2.55 billion

40. Operating margin: 3 percent

41. Operating EBIDA margin: 7.1 percent

42. Excess margin: 5.5 percent

43. EBIDA margin: 10.9 percent

“A” rating

44. Net patient service revenue: $2.69 billion

45. Total operating revenue: $3.07 billion

46. Operating margin: 0.7 percent

47. Operating EBIDA margin: 6.6 percent

48. Excess margin: 5.5 percent

49. EBIDA margin: 2.3 percent

“A-” rating

50. Net patient service revenue: $2.08 billion

51. Total operating revenue: $2.69 billion

52. Operating margin: 0.6 percent

53. Operating EBIDA margin: 6.7 percent

54. Excess margin: 2.4 percent

55. EBIDA margin: 8 percent

“BBB+” rating

56. Net patient service revenue: $1.85 billion

57. Total operating revenue: $2.27 billion

58. Operating margin: -0.2 percent

59. Operating EBIDA margin: 5 percent

60. Excess margin: 0.5 percent

61. EBIDA margin: 6 percent

“BBB” rating

62. Net patient service revenue: $2.96 billion

63. Total operating revenue: $4.11 billion

64. Operating margin: -3.2 percent

65. Operating EBIDA margin: 1.6 percent

66. Excess margin: -2 percent

67. EBIDA margin: 2.8 percent

18 health systems with strong finances

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Hospital Mergers, Acquisitions, and Affiliations | Case Study – RMS

Here are 18 health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.

1. Altamonte Springs, Fla.-based AdventHealth has an “Aa2” rating and stable outlook with Moody’s and an “AA” rating and a stable outlook with Fitch. The system has strong profitability, solid liquidity and presence in several high growth markets, Fitch said.

2. St. Louis-based BJC HealthCare has an “AA” rating and stable outlook with S&P and an “Aa2” rating and stable outlook with Moody’s. The health system has a leading market share and a highly regarded reputation, particularly for its flagship hospitals that are affiliated with Washington University School of Medicine in St. Louis, S&P said. The health system has consistently produced stable earnings and cash flow, even during the COVID-19 pandemic, according to the credit rating agency. 

3. Dallas-based Children’s Health System of Texas has an “AA” rating and stable outlook with Fitch. The system has robust operating profitability, good expense management and strong EBITDA margins, according to Fitch. 

4. Cleveland Clinic has an “Aa2” rating and stable outlook with Moody’s. The system’s international brand will allow it to grow revenue outside of the northeast Ohio market and offset the effects of the pandemic on patient volume, Moody’s said. The credit rating agency expects the system to maintain good cash flow margins. 

5. Evansville, Ind.-based Deaconess Health System has an “AA” rating and stable outlook with Fitch. The health system has strong operating performance and an expanding footprint in a stable and economically diverse service area, Fitch said. Investments in core service lines should help support patient volume growth, according to the credit rating agency. 

6. Durham, N.C.-based Duke Health has an “AA” rating and stable outlook with Fitch. The system has a strong clinical reputation and a solid balance sheet with substantial liquidity reserves, Fitch said. 

7. Pinehurst, N.C.-based FirstHealth of the Carolinas has an “AA” rating and stable outlook with Fitch. The health system has a strong financial profile and stable operating performance, despite disruption from the COVID-19 pandemic, Fitch said. The health system’s revenue in the first quarter of fiscal 2021 rebounded to levels close to historical trends, according to the credit rating agency. 

8. Milwaukee-based Froedtert Health has an “AA” rating and stable outlook with Fitch. The system has a solid market position and a robust liquidity position, Fitch said. The credit rating agency expects Froedtert to maintain robust operating cash flow levels. 

9. Indianapolis-based Indiana University Health has an “Aa2” rating and stable outlook with Moody’s and an “AA” rating and positive outlook with Fitch. Cost controls and patient volume will help the system sustain strong margins and liquidity, Moody’s said. 

10. IHC Health Services, the borrowing group of Salt Lake City-based Intermountain Healthcare, has an “Aa1” rating and stable outlook with Moody’s. Intermountain has a leading statewide market position, low debt levels and strong cash levels, Moody’s said. The credit rating agency expects Intermountain will sustain strong margins and cash levels. 

11. Falls Church, Va.-based Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The system has a strong financial profile, and Moody’s expects Inova’s balance sheet to remain exceptionally strong. 

12. Rochester, Minn.-based Mayo Clinic has an “Aa2” rating and stable outlook with Moody’s. The health system has strong balance sheet measures, an excellent market position and strong patient demand at its three academic campuses in Minnesota, Arizona and Florida, Moody’s said. The credit rating agency expects strong patient demand and steps taken by management to allow Mayo to maintain adequate cash flow and strengthen balance sheet measures. 

13. Traverse City, Mich.-based Munson Healthcare has an “AA” rating and stable outlook with Fitch. The system has strong leverage and liquidity, Fitch said. The credit rating agency expects Munson to maintain solid operating cash flow margins. 

14. Tupelo-based North Mississippi Health Services has an “AA” rating and stable outlook with Fitch. The system has a leading market share in a large 20-county service area and strong adjusted leverage metrics, Fitch said. 

15. Chicago-based Northwestern Memorial HealthCare has an “Aa2” rating and stable outlook with Moody’s and an “AA+” rating and stable outlook with S&P. The health system had strong pre-COVID margins and liquidity, Moody’s said. The credit rating agency expects the system to maintain strong operating cash flow margins. 

16. Columbus-based OhioHealth has an “Aa2” rating and stable outlook with Moody’s and an “AA+” rating and stable outlook with S&P. The system has a leading market position and opportunities for service line expansion, Moody’s said. The credit rating agency expects the system’s strong liquidity to provide ample cushion for volatility in investment returns. 

17. Stanford (Calif.) Health Care has an “AA” rating and stable outlook with Fitch. The system has broad reach and is a clinical destination for high acuity services, Fitch said. The credit rating agency expects the system to sustain strong EBITDA margins. 

18. Iowa City-based University of Iowa Hospitals & Clinics has an “Aa2” rating and stable outlook with Moody’s. The credit rating agency expects the system to maintain strong operating performance and cash flow. The system benefits as the only academic medical center in Iowa, according to Moody’s. 

10 health systems with strong finances

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Here are 10 hospitals and health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings and Moody’s Investors Service. 

1. Altamonte Springs, Fla.-based AdventHealth has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the system benefits from strong operating cash flow margins, low operating leverage and a large scale with presence in multiple states.  

2. Children’s Hospital of Philadelphia has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the rating is reflective of Children’s Hospital of Philadelphia’s strong market position and brand equity as a top U.S. children’s hospital with advanced clinical research. The pediatric hospital network also has strong liquidity.

3. Cleveland Clinic has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the health system benefits from its reputation as an international brand, which will allow it to grow revenue outside of the Ohio market. Moody’s said it maintains good cash flow margins and therefore very strong liquidity.

4. Cottage Health in Santa Barbara, Calif., has an “AA-” rating and stable outlook from Fitch. The credit rating agency said Cottage benefits from consistently strong profitability, a strong balance sheet and leading market position. Fitch also said the health system has broad reach in a service area that has high demand for acute care services. 

5. Froedtert Health in Wauwatosa, Wis., has an “AA” rating and stable outlook from Fitch. The credit rating agency said the rating reflects the health system’s solid market position and robust liquidity position, as well as its strong utilization trends and operational metrics in recent years. 

6. Indiana University Health in Indianapolis has an “AA” rating and positive outlook from Fitch. The credit rating agency said the health system has a long track record of strong operating margins and a “remarkably solid” balance sheet. The system also benefits as the largest healthcare system and academic medical center in Indiana, according to Fitch.

7. Vineland, N.J.-based Inspira Health has an “AA-” rating and stable outlook from Fitch. The credit rating agency said the rating is supported by Inspira’s stable financial profile, leading market position, large medical staff and expansive outpatient network. Fitch also said Inspira saw a strong operating performance through the construction and transition of its new campus, an IT implementation and through the peak of the pandemic.

8. Sanford Health in Sioux Falls, S.D., has an “AA-” rating and stable outlook from Fitch. The credit rating agency said the “AA-” rating reflects Sanford’s leading inpatient market share in multiple states and strong financial profile. Fitch also said Sanford’s growing health plan and plan for continued improvement and balance sheet growth are credit positives. 

9. Spectrum Health in Grand Rapids, Mich., has an “Aa3” rating and stable outlook with Moody’s. The credit rating agency said the health system has a stable operating performance and strong balance sheet metrics. In particular, the system generated positive margins even without federal aid in fiscal year 2020. Moody’s said the health system will continue to benefit from a strong market share for patient care in western Michigan. 

10. Texas Children’s Hospital in Houston has an “Aa2” rating and stable outlook from Moody’s. The credit rating agency said the children’s hospital network benefits from favorable leverage metrics and strong liquidity. Moody’s also said Texas Children’s has very strong patient demand and high acuity services as the academic medical center for Baylor College of Medicine’s pediatric department in Houston.

4 recent health system credit rating downgrades

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Rating agencies brace for backlash after rash of downgrades | Financial Times

The following four health system credit rating downgrades occurred in the past three months. They are listed in alphabetical order. 

1. Mercy Hospital (Iowa City, Iowa) — from “Ba3” to “B1” (Moody’s Investors Service)
“The downgrade to B1 reflects the near term challenges that Mercy will face following the large operating loss in fiscal 2020, narrow headroom to the debt service covenant in fiscal 2020 and the pronounced December COVID surge, creating headwinds to retire to historical levels of stronger financial performance,” Moody’s said. 

2. NYC Health + Hospitals — from “AA-” to “A+” (Fitch Ratings) 
“The downgrade of the NYCHCC bonds is tied to the downgrade of the city’s IDR to ‘AA-‘ from ‘AA’, and reflects Fitch’s expectation that the impact of the coronavirus and related containment measures will have a longer-lasting impact on New York’s economic growth than most other parts of the country,” Fitch said.

3. The Methodist Hospitals (Gary, Ind.) — from “BBB” to “BBB-” (Fitch Ratings)
“The downgrade to ‘BBB-‘ is based on continued operating constraints after significant losses in 2017 through 2019. Interim nine-month fiscal 2020 operating income results, despite the pandemic, reflect an early stabilization trend but at weaker levels that are more consistent with the prior three years,” Fitch said.

4. Tower Health (West Reading, Pa.) — from “BB+” to “BB-” (S&P Global Ratings); from “BB+” to “B+” (Fitch Ratings)
“The two-notch downgrade reflects our view of Tower Health’s continued significant operating losses through the interim period ended Dec. 31, 2020, which have been higher than expected, coupled with recent resignations of members of the senior management team,” said S&P Global Ratings credit analyst Anne Cosgrove.

Debt default risk for hospitals drops from 2020 high

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UAE firms face default risk as customers delay payments | Business Insurance

The likelihood that U.S. hospitals will default on debt within the next year fell significantly since the 2020 peak amid the early days of the pandemic, according to a March 10 report from S&P Global Market Intelligence. 

In 2020, the median default odds jumped to 8.1 percent. However, as of March 8, the probability of default rate fell to 0.9 percent. 

Samuel Maizel, a partner from law firm Dentons, told S&P Global that many hospitals operate on razor-thin margins, and they are seeing less cash flow amid the pandemic as patients shy away from receiving care, but stimulus funds should help avert a tidal wave of hospital bankruptcies in the next year.

“They’re sitting on a lot of cash, which gives them a cushion, even though they’re continuing to lose money,” Mr. Maizel told S&P Global. 

S&P said that as stimulus funds dry up other pressures may challenge healthcare facilities.

11 health systems with strong finances

11 health systems with strong finances

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Hospital Mergers, Acquisitions, and Affiliations | Case Study – RMS

Here are 11 health systems and hospitals with strong operational metrics and solid financial positions, according to reports from Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.

1. Morristown, N.J.-based Atlantic Health System has an “Aa3” rating and stable outlook with Moody’s. The credit rating agency expects the health system to continue to generate favorable operating performance and to maintain double-digit operating cash flow margins and solid debt coverage. 

2. Charlotte, N.C.-based Atrium Health has an “Aa3” rating and stable outlook with Moody’s and an “AA-” rating and stable outlook with S&P. Atrium and Winston-Salem, N.C.-based Wake Forest Baptist Health merged in October. The addition of the Winston-Salem service area and Wake Forest Baptist’s academic and research programs enhances Atrium’s position within the highly competitive North Carolina healthcare market, S&P said. 

3. Dallas-based Baylor Scott & White Health has an “Aa3” rating and stable outlook with Moody’s. The system has strong liquidity and is the largest nonprofit health system in Texas, Moody’s said. The credit rating agency expects Baylor Scott & White Health to continue to benefit from its centralized operating model, proven ability to execute complex strategies and well-developed planning abilities. 

4. Pittsfield, Mass.-based Berkshire Health System has an “AA-” rating and stable outlook with Fitch. The health system has improved its liquidity while investing in facilities without increasing its debt load, Fitch said. The credit rating agency expects the system to maintain a strong financial profile. 

5. Mishawaka, Ind.-based Franciscan Alliance has an “Aa3” rating and stable outlook with Moody’s. The system has leading positions in key markets and a strong cash position, Moody’s said. The credit rating agency expects the system to sustain double-digit operating cash flow margins. 

6. Falls Church, Va.-based Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The system has a strong financial profile, and Moody’s expects Inova’s balance sheet to remain exceptionally strong. 

7. Palo Alto, Calif.-based Lucile Packard Children’s Hospital at Stanford has an “AA-” rating and stable outlook with Fitch. The hospital is nationally known, has a strong market position and is one of two key clinical partners of Stanford University, Fitch said. 

8. Grand Blanc, Mich.-based McLaren Health Care has an “AA-” rating and stable outlook with Fitch. The health system has a strong financial profile and a leading market position over a broad service area that covers much of Michigan, Fitch said. 

9. Winston-Salem, N.C.-based Novant Health has an “AA-” rating and stable outlook with Fitch. The system has strong margins, and each of its markets has met or exceeded budgeted expectations over the past four years, Fitch said. 

10. Renton, Wash.-based Providence has an “Aa3” rating and stable outlook with Moody’s. Providence has a large revenue base and a leading market share in most of its markets, according to Moody’s. The credit rating agency expects the system’s operations to improve this year. 

11. Livonia, Mich.-based Trinity Health has an “AA-” rating and stable outlook with Fitch. The rating is driven by Trinity’s national size and scale, with significant market presence in several states, Fitch said. The credit rating agency expects the system’s operating margins to improve in the long term. 

14 health systems with strong finances

14 health systems with strong finances

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Hospital Mergers, Acquisitions, and Affiliations | Case Study – RMS

Here are 14 health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.

1. St. Louis-based Ascension has an “AA+” rating and stable outlook with Fitch and an “Aa2” rating and stable outlook with Moody’s. The system has a strong financial profile and a significant presence in several key markets, Fitch said. The credit rating agency expects Ascension will continue to produce healthy operating margins. 

2. Charlotte, N.C.-based Atrium Health has an “Aa3” rating and stable outlook with Moody’s and an “AA-” rating and stable outlook with S&P. Atrium and Winston-Salem, N.C.-based Wake Forest Baptist Health merged in October. The addition of the Winston-Salem service area and Wake Forest Baptist’s academic and research programs enhance Atrium’s position within the highly competitive North Carolina healthcare market, S&P said. 

3. Phoenix-based Banner Health has an “AA-” rating and stable outlook with Fitch and S&P. Banner’s financial profile is strong, even taking into consideration the market volatility that occurred in the first quarter of 2020, Fitch said. The credit rating agency expects the system to continue to improve operating margins and to generate cash flow sufficient to sustain strong key financial metrics. 

4. Dallas- based Baylor Scott & White Health has an “Aa3” rating and stable outlook with Moody’s. The system has strong liquidity and is the largest nonprofit health system in Texas, Moody’s said. The credit rating agency expects Baylor Scott & White Health to continue to benefit from its centralized operating model, proven ability to execute complex strategies and well-developed planning abilities. 

5. Newark, Del.-based ChristianaCare Health System has an “Aa2” rating and stable outlook with Moody’s. The health system has extensive clinical depth and includes Delaware’s largest teaching hospital, Moody’s said. The system’s strong market position will help it resume near pre-pandemic level margins in fiscal year 2021, according to Moody’s. 

6. Falls Church, Va.-based Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The system has a strong financial profile, and Moody’s expects Inova’s balance sheet to remain exceptionally strong. 

7. Philadelphia-based Main Line Health has an “AA” rating and stable outlook with Fitch. The credit rating agency expects the system’s operations to recover after the COVID-19 pandemic and for it to resume its track record of strong operating cash flow margins. 

8. Rochester, Minn.-based Mayo Clinic has an “Aa2” rating and stable outlook with Moody’s. The system has an excellent reputation and generates strong patient demand at its academic medical centers in Minnesota, Arizona and Florida, Moody’s said. The credit rating agency said strong patient demand and proactive expense control measures would likely fuel good results for Mayo for the fiscal year that ended Dec. 31.

9. Midland-based MidMichigan Health has an “AA-” rating and stable outlook with Fitch. The system generated healthy operational levels through fiscal year 2020, and Fitch expects it to continue generating strong cash flow. 

10. Chicago-based Northwestern Memorial HealthCare has an “Aa2” rating and stable outlook with Moody’s. The health system had strong pre-COVID margins and liquidity, Moody’s said. The credit rating agency expects the system to maintain strong operating cash flow margins. 

11. Winston-Salem, N.C.-based Novant Health has an “AA-” rating and stable outlook with Fitch. The system has strong margins and each of its markets have met or exceeded budgeted expectations over the past four years, Fitch said.  

12. Albuquerque, N.M.-based Presbyterian Healthcare Services has an “AA” rating and stable outlook with Fitch. The health system has a strong financial profile and a leading market position in Albuquerque and throughout New Mexico, Fitch said. The credit rating agency said it believes Presbyterian Healthcare Services is more resilient to pandemic disruptions than most other hospital systems. 

13. Renton, Wash.-based Providence has an “Aa3” rating and stable outlook with Moody’s. Providence has a large revenue base and a leading market share in most of its markets, according to Moody’s. The credit rating agency expects the system’s operations to improve this year. 

14. Livonia, Mich.-based Trinity Health has an “AA-” rating and stable outlook with Fitch. The rating is driven by Trinity’s national size and scale, with significant market presence in several states, Fitch said. The credit rating agency expects the system’s operating margins to improve in the long term. 

9 hospitals with strong finances

9 hospitals with strong finances

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Here are nine hospitals and health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.

1. St. Louis-based Ascension has an “AA+” rating and stable outlook with Fitch. The system has a strong financial profile and a significant presence in several key markets, Fitch said. The credit rating agency expects Ascension will continue to produce healthy operating margins. 

2. Phoenix-based Banner Health has an “AA-” rating and stable outlook with Fitch and S&P. Banner’s financial profile is strong, even taking into consideration the market volatility that occurred in the first quarter of this year, Fitch said. The credit rating agency expects the system to continue to improve operating margins and to generate cash flow sufficient to sustain strong key financial metrics. 

3. Cincinnati-based Bon Secours Mercy Health has an “AA-” rating and stable outlook with Fitch. The health system has a good payer mix, a leading position in several of its markets and adequate margins to support its growth, Fitch said. The credit rating agency expects the system to maintain strong operating profitability.  

4. Children’s Hospital of Philadelphia has an “Aa2” rating and stable outlook with Moody’s and an “AA” rating and stable outlook with S&P. The hospital has a strong market position and healthy liquidity, Moody’s said. The credit rating agency expects CHOP’s market position and brand equity will support its recovery from disruption caused by COVID-19. 

5. Milwaukee-based Children’s Wisconsin has an “Aa3” rating and stable outlook with Moody’s and an “AA” rating and stable outlook with S&P. The health system has strong cash flow margins, Moody’s said. The credit rating agency expects the health system’s financial performance to remain solid, given its commanding market presence and demand for services. 

6. Philadelphia-based Main Line Health has an “AA” rating and stable outlook with Fitch. The credit rating agency expects the system’s operations to recover after the COVID-19 pandemic and for it to resume its track record of strong operating cash flow margins. 

7. Midland-based MidMichigan Health has an “AA-” rating and stable outlook with Fitch. The system has generated healthy operational levels through fiscal year 2020, and Fitch expects it to continue generating strong cash flow. 

8. Columbus, Ohio-based Nationwide Children’s Hospital has an “Aa2” rating and stable outlook with Moody’s. The system has a strong market position in pediatric services in Columbus and the broad central Ohio region, and its advanced research capabilities will support volume recovery from disruption caused by COVID-19, Moody’s said. The credit rating agency expects Nationwide Children’s margins to remain strong and for cost management initiatives and volume recovery to drive improvements. 

9. Chicago-based Northwestern Memorial HealthCare has an “Aa2” rating and stable outlook with Moody’s. The health system had strong pre-COVID margins and liquidity, Moody’s said. The credit rating agency expects the system to maintain strong operating cash flow margins. 

How to gauge your hospital’s financial health

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How to gauge your hospital's financial health

Some rural hospitals that were already struggling are now in serious financial trouble due to the coronavirus.

The suspension of elective surgery and non-urgent care in most states led to an abrupt drop in patient volumes and hospital revenue. That loss, combined with the cost of preparing for COVID-19 protections for patients and employees, has forced rural hospitals into deeper distress. It’s especially important in these challenging circumstances to keep a close eye on key metrics that gauge a hospital’s financial health. By monitoring indicators, creating transparency and responding swiftly to warning signals of financial distress, hospitals can stave off bankruptcy or closure and establish a new path toward long-term sustainability. 

A Shared Responsibility

Signs that a hospital is headed for, or already in, financial distress include obvious indicators such as declining revenues or a dip in patient volume. Although some distress signals seem loud and clear, problems persist at many hospitals due to lack of communication and financial assessment across the enterprise. Too often, it’s left to the CFO to monitor overall financial health by measuring against budgets and recent trends. However, a regular review of key metrics should be a shared responsibility for the entire healthcare leadership team.

Five Data Points to Review

Hospitals may need to adjust key targets to bring them in line with what’s realistically achievable while the pandemic persists, particularly when it comes to productivity, PPE costs and net revenue metrics. Think wisely and as a team about how to reassess targets. The following data points should be monitored regularly. 

  1. Aggregate volume and provider utilization trends. This data can offer a big-picture perspective to leaders and managers across departments.
  2. Operating ratios, including expenses as a percentage of net operating revenue. Make sure costs such as labor, supplies and purchased services remain in check. 
  3. Labor costs relative to patient volume. Measure productivity in each department against department specific staffing targets as well as the overall FTE per adjusted occupied bed target for the hospital as a whole.
  4. Patient revenue indicators. These include bad debt percentage and net to gross percentage by payer class. Are there shifts in payer mix that need to be addressed?
  5. Liquidity ratios. These include net days in patient accounts receivable and cash collections as a percentage of net revenue. What steps can be taken to improve cash flow?

Information Gathering

Hospital leadership should conduct a monthly review of the key measures listed above. In addition, procedures should be put in place by the hospital’s finance department, with input from department managers, to produce accurate monthly stats and financial performance metrics to facilitate these periodic reviews. Annually, take a closer look at these financial indicators, as these will form the basis of strategic planning. 

Federal Funding

The COVID-19 crisis reinforces the need for financial diligence and discipline. Rural hospitals received federal funding to help them during the crisis, and this created another layer of data to monitor. Whether in the form of a CARES Act grant, a PPP loan or some other type of funding, these outlays must be closely controlled, properly managed and restricted in use so the hospital does not run out of cash. In certain cases, the federal government will require hospitals to document the use of funds. For example, for CARES Act stimulus payments, hospitals must provide attestation (quarterly beginning in July) that funds are used for COVID-related costs and COVID-related loss of revenue. In any case, CHC recommends that hospitals set up a tracking system to account for these funds. Download a financial dashboard to help.

Connect the Dots

Regular reviews of financial indicators can identify operational best practices, support strategic planning efforts, create accountability, and, if necessary, redirect financial sustainability efforts. The COVID-19 crisis accelerates the timeline during which financial improvements must be made. 

The most critical element of this entire process is answering, “Why?” This means finding the root causes for financial difficulties. Another critical element is clear communication of expectations and goals across hospital leadership in order to accomplish desired changes. The team, armed with data and clear objectives, can then get to the root of any problems. 

8 health systems with strong finances

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Here are eight health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.

1. Minneapolis-based Allina Health has an “AA-” rating and stable outlook with Fitch. The health system has a strong financial profile and is the acute care leader in the broad Twin Cities metro area, Fitch said. The credit rating agency said Allina’s proven ability to rebound quickly from operating challenges supports the stable outlook.

2. Children’s Healthcare of Atlanta has an “Aa2” rating and stable outlook with Moody’s. The system has strong operating margins and is the leading pediatric provider in the Atlanta area, Moody’s said. The credit rating agency expects Children’s Healthcare of Atlanta to continue to generate robust margins and maintain exceptional liquidity while undergoing a new campus expansion project.

3. La Crosse, Wis.-based Gundersen Health System has an “AA-” rating and stable outlook with Fitch. The health system has consistently strong operating performance, strong balance sheet metrics and a low debt burden, Fitch said. The credit rating agency said Gundersen’s rating continues to be supported by its leading market position and expanding operating platform.

4. Houston Methodist has an “AA” rating and stable outlook with S&P. The system, which comprises an academic medical center and six community hospitals, has a strong enterprise profile and a history of excellent margins and cash flow, S&P said. The credit rating agency said Houston Methodist is well positioned to withstand the pressures from COVID-19.

5. Indianapolis-based Indiana University Health has an “AA” rating and stable outlook with Fitch. The health system has a solid balance sheet and strong operating cash flow despite short-term pressure from the COVID-19 pandemic. The credit rating agency expects IU Health’s EBITDA margins will range between 12 percent and 14 percent annually when margins recover from the pandemic.

6. Broomfield, Colo.-based SCL Health has an “AA-” rating and stable outlook with Fitch and an “Aa3” rating and stable outlook with Moody’s. The system has a track record of exceptional operations, consistent improvement in unrestricted liquidity levels and significant financial flexibility, Fitch said. The credit rating agency said SCL Health is well positioned to manage the pressures of COVID-19, having built up cash reserves.

7. San Diego-based Scripps Health has an “AA” rating and stable outlook with Fitch and an “Aa3” rating and stable outlook with Moody’s. The health system has a strong balance sheet, strong operations and has maintained a low leverage position, Fitch said. The credit rating agency expects Scripps will continue generating operating levels that are consistent with historical trends following recovery from the pandemic.

8. San Diego-based Sharp HealthCare has an “Aa3” rating and stable outlook with Moody’s and an “AA” rating and stable outlook with S&P. The health system has a healthy financial profile, an excellent balance sheet, a solid business position and is the leading provider in a competitive service area, S&P said. The credit rating agency said the system’s financial performance has remained stable despite COVID-19 and the recession.