A bipartisan Senate report on private equity ownership of two health systems shows PE investment puts a priority of profit over patient health and hospital finances.
A yearlong investigation found that patient care deteriorated at both systems, while private equity owners received millions, according to the Senate Budget Committee’s bipartisan staff report, “Profits Over Patients: The Harmful Effects of Private Equity on the U.S. Health Care System.”
The investigation was led by Senate Budget Committee Chairman Sheldon Whitehouse, D-R.I., and Ranking Member Charles E. Grassley, R-Iowa.
WHY THIS MATTERS
The report centered on the hospital Ottumwa Regional Health Center in Iowa and its operating company, Lifepoint Health in Tennessee.
Private equity company Apollo Global Management owns Lifepoint Health.
The investigation expanded to include other entities, including PE firmLeonard Green & Partners and hospital operator Prospect Medical Holdings, in which Leonard Green & Partners held a majority stake. Leonard Green & Partners (LGP) is a private equity firm in Los Angeles that owns hospitals under Prospect Medical Holdings (PMH).
“LGP and PMH’s primary focus was on financial goals rather than quality of care at their hospitals, leading to multiple health and safety violations as well as understaffing and the closure of several hospitals,” the report said.
The investigation originated from questions over the role, if any, private equity played in a series of patient sexual assaults by a nurse practitioner at the Iowa hospital. In 2022, a nurse practitioner fatally overdosed on drugs acquired at the hospital. Police discovered the nurse had sexually assaulted nine incapacitated female patients over a two-year period, the report said.
Prospect Medical Holdings owns and operates hospitals in urban and suburban areas, primarily on the East and West Coasts, including Connecticut, Rhode Island, Pennsylvania and California.
It is a previously public traded company that went private in 2010 when LGP acquired a 61% majority stake. During the course of LGP’s majority ownership, Prospect Medical Holdings acquired 16 hospitals over a span of four years. PMH has operated a total of 21 unique hospitals, the report said.
Apollo has a 97% ownership stake in Lifepoint Health, a company that owns and operates acute care hospitals in predominantly rural areas. This includes Ottumwa Regional Health Center. Apollo owns around 220 hospitals nationwide, making it the single largest private equity owner of hospitals in the United States, the report said.
Ottumwa has been under PE ownership since 2010, when it was acquired by the PE-owned hospital operator RegionalCare, which was later acquired by Apollo.
KEY FINDINGS
The report’s key findings show that LGP controlled the Prospect Medical Holding board of directors, which incentivized management to satisfy financial goals regardless of patient outcomes.
“According to documents obtained by the committee, discussion amongst PMH and LGP leadership during board meetings centered around profits, costs, acquisitions, managing labor expenses and increasing patient volume – with little or no discussion of patient outcomes or quality of care.”
Current PMH leadership has overseen the closure of eight hospitals, with three-fourths coming during or directly after LGP’s majority ownership, including four in Texas and two in Pennsylvania.
Several hospitals suffered from labor cuts, decreased patient capacity, unsafe building maintenance and financial distress, the report said.
Despite this, LGP took home $424 million of the $645 million that PMH paid out in dividends and preferred stock redemption, in addition to over $13 million in fees, leaving PMH in severe financial distress.
In order to pay investors dividend distributions, PMH was forced to take on hundreds of millions of dollars in debt, running out of cash and defaulting on its loans, the report said.
ORHC’s PE owned companies, including Lifepoint Health, have failed to fulfill at least seven promises, including legally binding ones made to Ottumwa, including those related to growth, physician recruitment, routine capital expenditures, charity care, patient satisfaction and continuation of services.
Patient volumes have decreased, likely due to long wait times in the ER, outgoing transfers, insufficient staffing and a lack of specialists, the report said. This has also resulted from having a poor reputation in the community.
Because of financial harm, OTHC is dependent on Lifepoint Health to pay its expenses.
However, Lifepoint pays Apollo $9.2 million annually in management fees, as well as a 1% transaction fee each time Lifepoint completes an acquisition, which included a $55 million fee in relation to the acquisition of Lifepoint Health in 2018.
THE LARGER TREND
PE and other private funds had less than $1 trillion in managed assets in 2004, but now manage more than $13 trillion globally. PE firms create affiliated funds with money raised from investors, such as pension funds, foundations and insurance companies. The intention is generating returns for their investors within a short period of time.
PE has grown in healthcare. In the 2010s investors spent more than $1 trillion. By 2021 PE investment had reached an all-time high of 515 deals valued at $151 billion.
ON THE RECORD
“Recent peer reviewed studies have generally found negative consequences for general acute care hospitals during the first three years of PE ownership as compared to non-PE owned hospitals, including lower quality of care, increased transfers to other hospitals, decreased staffing and higher prices,” the report said.
Pennsylvania state Sen. Tim Kearney has raised concerns about the lack of transparency and details around the planned sale of Upland, Pa.-based Crozer Health and has called on the state attorney general to step in and conduct a thorough analysis of the deal, the Daily Times reported Aug. 22.
Earlier this month, Los Angeles-based Prospect Medical Holdings and CHA Partners signed a letter of intent for CHA to acquire Crozer. The proposed deal would involve transitioning Crozer’s four hospitals back to nonprofit status.
“Prospect’s proposed sale of Crozer to CHA Partners LLC exemplifies the need for state oversight of hospital sales, as both entities appear to have histories of burning public partners despite demanding hefty subsidies,” Mr. Kearney said in a statement shared with Becker’s.
Unlike many other states, Pennsylvania’s Attorney General lacks statutory authority to deeply evaluate these deals, according to Mr. Kearney.
“While the AG’s legal settlement with Prospect gives them some oversight of this deal, the legislature needs to provide the AG with greater authority to protect hospitals and the communities that depend on them,” he said. “If the choice is CHA or closure, then we need some assurances that they will be a responsible organization and not just a profiteering speculator.”
Prospect, a for-profit company, plans to sell nine of its 16 hospitals in Pennsylvania, Rhode Island and Connecticut and is also being investigated by the Justice Department for alleged violations of the False Claims Act. A spokesperson for Prospect told Becker’s the system will continue to cooperate with the investigation, but feels that the allegations have no merit.
CHA did not respond to Becker’s request for comment.
Here are 67 health systems with strong operational metrics and solid financial positions, according to reports from credit rating agencies Fitch Ratings and Moody’s Investors Service released in 2024.
AdventHealth has an “AA” rating and stable outlook with Fitch. The rating is based on the Altamonte Springs, Fla.-based system’s competitive market position—especially in its core Florida markets—and its financial profile, Fitch said.
Advocate Health members Advocate Aurora Health and Atrium Health have “Aa3” ratings and positive outlooks with Moody’s. The ratings are supported by the Charlotte, N.C.-based system’s significant scale, strong market share across several major metro areas, and good financial performance and liquidity, Moody’s said.
AnMed Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Anderson, S.C.-based system’s strong and stable operating performance and leading market position in a sound service area, Fitch said.
Ann & Robert H. Lurie Children’s Hospital of Chicago has an “AA” rating and stable outlook with Fitch. The rating is supported by the system’s strong balance sheet with low leverage ratios derived from modest debt, Fitch said.
Atlantic Health System has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Morristown, N.J.-based system’s fundamental strengths, including strong operating performance with high single digit operating cash flow margins and favorable liquidity of over 300 days cash on hand, Moody’s said.
Avera Health has an “AA-” rating and a stable outlook with Fitch. The rating reflects the Sioux Falls, S.D.-based system’s strong operating risk and financial profile assessments, and significant size and scale, Fitch said.
BayCare Health System has an “AA” rating and stable outlook with Fitch. The Clearwater, Fla.-based system on June 30 moved to a new corporate legal structure, replacing a joint operating agreement between multiple hospitals that were responsible for the creation of BayCare in 1997. Fitch views the dissolution of the JOA and the move to the new structure as a credit positive.
Beacon Health System has an “AA-” rating and stable outlook with Fitch. Fitch said the rating reflects the strength of the South Bend, Ind.-based system’s balance sheet.
Bon Secours Mercy Health has an “AA-” rating and stable outlook with Fitch. The Cincinnati-based system has a favorable and stable payor mix, leading or secondary market share position in nine of its 11 U.S. markets with improving market share positions in eight, and adequate cash flows to support the system’s strategic plans, Fitch said.
BJC Health System has an “Aa2” rating and stable outlook with Moody’s. The St. Louis-based system reflects its reputation as a leading academic medical center with a long-standing affiliation with Washington University School of Medicine, Moody’s said.
Carle Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Urbana, Ill.-based system’s distinctly leading market position over a broad service area and Fitch’s expectation that the system will sustain its strong capital-related ratios in the context of the system’s midrange revenue defensibility and strong operating risk profile assessments.
Carilion Clinic has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Roanoke, Va.-based system’s scale, regional significance as a tertiary referral system with broad geographic capture, and a highly integrated physician base with a well-defined culture, Moody’s said.
Cedars-Sinai Health System has an “AA-” rating and a stable outlook with Fitch. The rating reflects the Los Angeles-based system’s consistent historical profitability and its strong liquidity metrics, historically supported by significant philanthropy, Fitch said.
Children’s Health has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Dallas-based system’s continued strong performance from a focus on high margin and tertiary services, as well as a distinctly leading market share, Moody’s said.
Children’s Hospital Medical Center of Akron (Ohio) has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the system’s large primary care physician network, long-term collaborations with regional hospitals, and leading market position as its market’s only dedicated pediatric provider, Moody’s said.
Children’s Hospital of Orange County has an “AA-” rating and a stable outlook with Fitch. The rating reflects the Orange, Calif.-based system’s position as the leading provider for pediatric acute care services in Orange County, a position solidified through its adult hospital and regional partnerships, ambulatory presence, and pediatric trauma status, Fitch said.
Children’s Minnesota has an “AA” rating and stable outlook with Fitch. The rating reflects the Minneapolis-based system’s strong balance sheet, robust liquidity position, and dominant pediatric market position, Fitch said.
Cincinnati Children’s Hospital Medical Center has an “Aa2” rating and stable outlook with Moody’s. The rating is supported by its national and international reputation in clinical services and research, Moody’s said.
Cleveland Clinic has an “Aa2” rating and stable outlook with Moody’s. The rating reflects the system’s strength as an international brand in highly complex clinical care and research and centralized governance model, the ratings agency said.
Cook Children’s Medical Center has an “Aa2” rating and stable outlook with Moody’s. The ratings agency said the Fort Worth, Texas-based system will benefit from revenue diversification through its sizable health plan, large physician group, and an expanding North Texas footprint.
Corewell Health has an “Aa3” rating and stable outlook with Fitch. The rating reflects the Grand Rapids and Southfield, Mich.-based system’s significant scale as a provider and payer in Michigan, Moody’s said. The organization also has good and stable financial performance and liquidity.
El Camino Health has an “AA” rating and a stable outlook with Fitch. The rating reflects the Mountain View, Calif.-based system’s strong operating profile assessment with a history of generating double-digit operating EBITDA margins anchored by a service area that features strong demographics as well as a healthy payer mix, Fitch said.
Froedtert ThedaCare Health has an “AA” rating and stable outlook with Fitch. The rating reflects the Milwaukee-based system’s solid market position, track record of strong utilization and operations, and strong financial profile, Fitch said.
Hoag Memorial Hospital Presbyterian has an “AA” rating and stable outlook with Fitch. The Newport Beach, Calif.-based system’s rating is supported by its strong operating risk assessment, leading market position in its immediate service area, and strong financial profile, Fitch said.
Holland (Mich.) Hospital has an “AA-” rating and stable outlook with Fitch. The rating reflects Holland Hospital’s stable and strong liquidity and capital-related metrics despite sector-wide operating pressures, Fitch said.
Indiana University Health has an “AA” rating and stable outlook with Fitch. The rating reflects the Indianapolis-based health system’s sustained track record of strong operating margins, ratings agency said.
Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The Falls Church, Va.-based system’s rating is anchored by its role as one of the largest health systems in Virginia with a leading market position in a rapidly growing region with unusually high commercial business, Moody’s said.
Inspira Health has an “AA-” rating and stable outlook with Fitch. The rating reflects Fitch’s expectation that the Mullica Hill, N.J.-based system will return to strong operating cash flows following the operating challenges of 2022 and 2023, as well as the successful integration of Inspira Medical Center of Mannington (formerly Salem Medical Center).
JPS Health Network has an “AA” rating and stable outlook with Fitch. The rating reflects the Fort Worth, Texas-based system’s sound historical and forecast operating margins, the ratings agency said.
Kaiser Permanente has an “AA-” rating and stable outlook with Fitch. The Oakland, Calif.-based system’s rating is driven by its strong financial profile, bolstered by a large and diversified revenue base, Fitch said.
Mass General Brigham has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Somerville, Mass.-based system’s strong reputation for clinical services and research at its namesake academic medical center flagships that drive excellent patient demand and help it maintain a strong market position, Moody’s said.
Mayo Clinic has an “Aa2” rating and stable outlook with Moody’s. The rating reflects the Rochester, Minn.-based system’s preeminent reputation for clinical care and research, including new discoveries and cutting-edge treatment, Moody’s said.
McLaren Health Care has an “AA-” rating and stable outlook with Fitch. The rating reflects the Grand Blanc, Mich.-based system’s leading market position over a broad service area covering much of Michigan, the ratings agency said.
McLeod Health has an “AA-” rating and stable outlook with Fitch. The Florence, S.C.-based system maintains a leading and growing market position in its primary service area and is expanding the Carolina’s Forest campus in an area that is expected to experience rapid growth over the coming years, Fitch said.
Med Center Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Bowling Green, Ky.-based system’s strong operating risk assessment and leading market position in a primary service area with favorable population growth, Fitch said.
Memorial Healthcare System has an “Aa3” rating and stable outlook with Moody’s. Moody’s said the rating reflects that the Hollywood, Fla.-based system will continue to benefit from good strategic positioning of its large, diversified geographic footprint.
Memorial Hermann Health System has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Houston-based system’s leading and expanding market position and strong demand in a growing region, Moody’s said.
Methodist Health System has an “Aa3” rating and stable outlook with Moody’s. Moody’s said the rating reflects the Dallas-based system’s consistently strong operating performance, excellent liquidity, and very good market position.
Monument Health has an “AA-” rating and stable outlook with Fitch. The ratings agency said the Rapid City, S.D.-based system has a dominant inpatient market position as the leading acute care provider in its geographically broad primary service area
Nationwide Children’s Hospital has an “Aa2” rating and stable outlook with Moody’s. The rating reflects the Columbus, Ohio-based system’s strong market position in pediatric services, growing statewide and national reputation, and continued expansion strategies.
Nicklaus Children’s Hospital has an “AA-” rating and stable outlook with Fitch. The rating is supported by the Miami-based system’s position as the “premier pediatric hospital in South Florida with a leading and growing market share,” Fitch said.
North Mississippi Health Services has an “AA” rating and stable outlook with Fitch. The rating reflects the Tupelo-based system’s strong cash position and strong market position with a leading market share in its primary services area, Fitch said.
Northwestern Memorial HealthCare has an “Aa2” rating and stable outlook with Moody’s. The rating reflects the Chicago-based system’s growing market position, single operating model and financial discipline, Moody’s said.
Novant Health has an “AA-” rating and stable outlook with Fitch. The ratings agency said the Winston-Salem, N.C.-based system’s recent acquisition of three South Carolina hospitals from Dallas-based Tenet Healthcare will be accretive to its operating performance as the hospitals are highly profited and located in areas with growing populations and good income levels.
Oregon Health & Science University has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Portland-based system’s top-class academic, research, and clinical capabilities, Moody’s said.
Orlando (Fla.) Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the health system’s strong and consistent operating performance and a growing presence in a demographically favorable market, Fitch said.
Parkland Health has an “AA-” rating and stable outlook with Fitch. The rating reflects Fitch’s expectation that the Dallas-based system will remain the leading provider of public (safety net) services in the vast Dallas County service area, supported by its tax levy.
Phoenix Children’s has an “AA-” rating and stable outlook with Fitch. The rating reflects the system’s strong cash flow generation that has significantly improved its balance sheet in recent years, Fitch said.
Presbyterian Healthcare Services has an “AA” rating and stable outlook with Fitch. The Albuquerque, N.M.-based system’s rating is driven by a strong financial profile combined with a leading market position with broad coverage in both acute care services and health plan operations, Fitch said.
Rady Children’s Hospital has an “Aa3” rating and stable outlook with Moody’s. The San Diego-based system’s rating reflects its well-established strengths, including an “extremely high” market share in all of San Diego County, Moody’s said.
Rush University System for Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Chicago-based system’s strong financial profile and an expectation that operating margins will rebound despite ongoing macro labor pressures, the rating agency said.
Saint Francis Healthcare System has an “AA” rating and stable outlook with Fitch. The rating reflects the Cape Girardeau, Mo.-based system’s strong financial profile, characterized by robust liquidity metrics, Fitch said.
Saint Luke’s Health System has an “Aa2” rating and stable outlook with Moody’s. The Kansas City, Mo.-based system’s rating was upgraded from “A1” after its merger with St. Louis-based BJC HealthCare was completed in January.
Salem (Ore.) Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the system’s dominant marketing position in a stable service area with good population growth and demand for acute care services, Fitch said.
Sarasota (Fla.) Memorial Health Care System has an “AA-” rating and stable outlook with Fitch. The rating reflects the system’s leading market position in a growing service area, robust historical operating cash flow levels and strong liquidity position, Fitch said.
Seattle Children’s Hospital has an “AA” rating and a stable outlook with Fitch. The rating reflects the system’s strong market position as the only children’s hospital in Seattle and provider of pediatric care to an area that covers four states, Fitch said.
SSM Health has an “AA-” rating and stable outlook with Fitch. The St. Louis-based system’s rating is supported by a strong financial profile, multistate presence and scale with good revenue diversity, Fitch said.
St. Elizabeth Medical Center has an “AA” rating and stable outlook with Fitch. The rating reflects the Edgewood, Ky.-based system’s strong liquidity, leading market position, and strong financial management, Fitch said.
St. Tammany Parish Hospital has an “AA-” rating and stable outlook with Fitch. The Covington, La.-based system has a strong operating risk assessment and very strong financial profile supported by consistently robust operating cash flows, Fitch said.
Stanford Health Care has an “Aa3” rating and positive outlook with Moody’s. The rating reflects the Palo Alto, Calif.-based system’s clinical prominence, patient demand, and its location in an affluent and well-insured market, Moody’s said.
UChicago Medicine has an “AA-” rating and stable outlook with Fitch. The rating reflects the system’s strong financial profile in the context of its broad and growing reach for high-acuity services, Fitch said.
University Health has an “AA+” rating and stable outlook with Fitch. The San Antonio-based system’s outlook is based on the Bexar County Hospital District’s significant tax margin, good cost management, and strong leverage position relative to its liquidity and outstanding debt.
University of Colorado Health has an “AA” rating and stable outlook with Fitch. The Aurora-based system’s rating reflects a strong financial profile benefiting from a track record of robust operating margins and the system’s growing share of a growth market anchored by its position as the only academic medical center in the state, Fitch said.
University of Kansas Health System has an “AA-” rating and stable outlook with Fitch. The rating reflects Kansas City-based system’s flagship hospital’s important presence as the only academic medical center in Kansas and a major provider of many high end and unique services to a large geographic area, Fitch said.
UW Health has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Madison, Wis.-based system’s strong clinical reputation, high acuity services, and important role as the academic medical center affiliated with the state’s flagship public university, Moody’s said.
VCU Health has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Richmond, Va.-based system’s status as one of Virginia’s leading academic medical centers and essential role as its largest safety net provider, supporting excellent patient demand at high acuity levels, Moody’s said.
Willis-Knighton Medical Center has an “AA-” rating and positive outlook with Fitch. The outlook reflects the Shreveport, La.-based system’s improving operating performance relative to the past two fiscal years combined with Fitch’s expectation for continued improvement in 2024 and beyond.
Some of America’s largest hospital systems saw their financials soar in the first half of 2024. And yet, more than 700 facilities across the country still are at risk of closing.
Why it matters:
It’s a familiar tale of the rich getting richer, as big, mostly for-profit health systems see improved margins while smaller facilities in outlying areas are barely hanging on.
That could worsen access for some of the most vulnerable Americans — and hasten consolidation in an industry that’s been a magnet for M&A.
The big picture:
Health systems with big footprints, including large academic medical centers, have weathered the pandemic and economic headwinds and are seeing margins as good or better than before COVID-19.
Nashville-based industry behemoth HCA Healthcare posted 23% year-over-year profit growth for the quarter, revising its forecast for the rest of the year, projecting it’ll reach as much as $6 billion. It posted a 10% year-over-year increase in revenue.
King of Prussia, Pennsylvania-based Universal Health Services similarly reported a strong quarter, posting nearly 69% growth on its bottom line over the same period last year while Dallas-based Tenet Healthcare reported a 111% jump in its net income over the same quarter last year.
Yes, but:
Smaller nonprofit hospitals, especially in rural areas, that made it through the crisis with the help of government aid are paring services like maternity wards and struggling to stay open.
“There are a lot of hospitals that survived, but their balance sheets are so weakened, their margin for error is basically zero at this point,” said Mike Eaton, senior vice president of strategy at population health company Navvis.
Hospitals that once could manage their expenses and the needs of communities are “going to really struggle to invest in what comes next,” he said.
Between the lines:
The biggest health systems have benefited from less volatility, seeing stabilizing drug prices and more predictable supply chains and labor costs, per a new report from Strata Decision Technology.
“It’s at least something you can manage to,” Steve Wasson, Strata’s chief data and intelligence officer, told Axios.
Revenues already were up thanks to renegotiated contracts health systems struck with payers last year, Wasson said.
There also have been changes on the federal side that boosted Medicare admissions and put some hospitals in line to be reimbursed for billions in underpayments from the 340B drug discount program.
Zoom in:
It’s all translated to operating margins that are up 17% year-to-date compared with the same time period in 2023, according to the latest Kaufman Hall National Hospital Flash Report.
Volumes as measured by hospital discharges per day are up 4% year-to-date.
Expenses per day are also up 6% year to date, including labor (4%), supplies (8%) and drugs (8%), but are far less volatile and thus easier to plan for, said Erik Swanson, senior vice president at Kaufman Hall.
But there’s a growing gulf between the top third of U.S. hospitals, which are seeing outsize growth, and the rest, Swanson said.
Threat level: A new report from the Center for Healthcare Quality and Payment Reform estimated 703 hospitals — or more than one-third of rural hospitals — are at risk of closure, based on Centers for Medicare and Medicaid Services financial information from July. Losses on privately insured patients are the biggest culprit.
“We’re looking at 50% of rural operating in the red. The situation is very challenging,” Michael Topchik, partner at Chartis Center for Rural Health, told Axios.
These smaller hospitals may still be there, but there will continue to be a steady erosion of the kinds of services they offer, such as obstetrics, cancer care and general surgery, he said.
What’s next:
Private equity investment in rural health care is already booming and with it, prospects for service and staffing cuts.
The South generally has the highest concentration of private equity-owned rural hospitals, often with lower patient satisfaction and fewer full-time staff compared with non-acquired hospitals, according to the Private Equity Stakeholder Project.
Congress is ramping up oversight of private equity investments in the sector, though most lawmakers are loath to take steps to actually halt deals.
Here are 48 health systems with strong operational metrics and solid financial positions, according to reports from credit rating agencies Fitch Ratings and Moody’s Investors Service released in 2024.
AdventHealth has an “AA” rating and stable outlook with Fitch. The rating is based on the Altamonte Springs, Fla.-based system’s competitive market position—especially in its core Florida markets—and its financial profile, Fitch said.
Advocate Health members Advocate Aurora Health and Atrium Health have “Aa3” ratings and positive outlooks with Moody’s. The ratings are supported by the Charlotte, N.C.-based system’s significant scale, strong market share across several major metro areas, and good financial performance and liquidity, Moody’s said.
Ann & Robert H. Lurie Children’s Hospital of Chicago has an “AA” rating and stable outlook with Fitch. The rating is supported by the system’s strong balance sheet with low leverage ratios derived from modest debt, Fitch said.
Avera Health has an “AA-” rating and a stable outlook with Fitch. The rating reflects the Sioux Falls, S.D.-based system’s strong operating risk and financial profile assessments, and significant size and scale, Fitch said.
Beacon Health System has an “AA-” rating and stable outlook with Fitch. Fitch said the rating reflects the strength of the South Bend, Ind.-based system’s balance sheet.
Carle Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Urbana, Ill.-based system’s distinctly leading market position over a broad service area and Fitch’s expectation that the system will sustain its strong capital-related ratios in the context of the system’s midrange revenue defensibility and strong operating risk profile assessments.
Carilion Clinic has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Roanoke, Va.-based system’s scale, regional significance as a tertiary referral system with broad geographic capture, and a highly integrated physician base with a well-defined culture, Moody’s said.
Cedars-Sinai Health System has an “AA-” rating and a stable outlook with Fitch. The rating reflects the Los Angeles-based system’s consistent historical profitability and its strong liquidity metrics, historically supported by significant philanthropy, Fitch said.
Children’s Health has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Dallas-based system’s continued strong performance from a focus on high margin and tertiary services, as well as a distinctly leading market share, Moody’s said.
Children’s Hospital Medical Center of Akron (Ohio) has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the system’s large primary care physician network, long-term collaborations with regional hospitals, and leading market position as its market’s only dedicated pediatric provider, Moody’s said.
Children’s Hospital of Orange County has an “AA-” rating and a stable outlook with Fitch. The rating reflects the Orange, Calif.-based system’s position as the leading provider for pediatric acute care services in Orange County, a position solidified through its adult hospital and regional partnerships, ambulatory presence, and pediatric trauma status, Fitch said.
Children’s Minnesota has an “AA” rating and stable outlook with Fitch. The rating reflects the Minneapolis-based system’s strong balance sheet, robust liquidity position, and dominant pediatric market position, Fitch said.
Cincinnati Children’s Hospital Medical Center has an “Aa2” rating and stable outlook with Moody’s. The rating is supported by its national and international reputation in clinical services and research, Moody’s said.
Cleveland Clinic has an “Aa2” rating and stable outlook with Moody’s. The rating reflects the system’s strength as an international brand in highly complex clinical care and research and centralized governance model, the ratings agency said.
Cook Children’s Medical Center has an “Aa2” rating and stable outlook with Moody’s. The ratings agency said the Fort Worth, Texas-based system will benefit from revenue diversification through its sizable health plan, large physician group, and an expanding North Texas footprint.
El Camino Health has an “AA” rating and a stable outlook with Fitch. The rating reflects the Mountain View, Calif.-based system’s strong operating profile assessment with a history of generating double-digit operating EBITDA margins anchored by a service area that features strong demographics as well as a healthy payer mix, Fitch said.
Froedtert ThedaCare Health has an “AA” rating and stable outlook with Fitch. The rating reflects the Milwaukee-based system’s solid market position, track record of strong utilization and operations, and strong financial profile, Fitch said.
Hoag Memorial Hospital Presbyterian has an “AA” rating and stable outlook with Fitch. The Newport Beach, Calif.-based system’s rating is supported by its strong operating risk assessment, leading market position in its immediate service area, and strong financial profile, Fitch said.
Inspira Health has an “AA-” rating and stable outlook with Fitch. The rating reflects Fitch’s expectation that the Mullica Hill, N.J.-based system will return to strong operating cash flows following the operating challenges of 2022 and 2023, as well as the successful integration of Inspira Medical Center of Mannington (formerly Salem Medical Center).
JPS Health Network has an “AA” rating and stable outlook with Fitch. The rating reflects the Fort Worth, Texas-based system’s sound historical and forecast operating margins, the ratings agency said.
Mass General Brigham has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Somerville, Mass.-based system’s strong reputation for clinical services and research at its namesake academic medical center flagships that drive excellent patient demand and help it maintain a strong market position, Moody’s said.
Mayo Clinic has an “Aa2” rating and stable outlook with Moody’s. The rating reflects the Rochester, Minn.-based system’s preeminent reputation for clinical care and research, including new discoveries and cutting-edge treatment, Moody’s said.
McLaren Health Care has an “AA-” rating and stable outlook with Fitch. The rating reflects the Grand Blanc, Mich.-based system’s leading market position over a broad service area covering much of Michigan, the ratings agency said.
Med Center Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Bowling Green, Ky.-based system’s strong operating risk assessment and leading market position in a primary service area with favorable population growth, Fitch said.
Memorial Healthcare System has an “Aa3” rating and stable outlook with Moody’s. Moody’s said the rating reflects that the Hollywood, Fla.-based system will continue to benefit from good strategic positioning of its large, diversified geographic footprint.
Memorial Hermann Health System has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Houston-based system’s leading and expanding market position and strong demand in a growing region, Moody’s said.
Methodist Health System has an “Aa3” rating and stable outlook with Moody’s. Moody’s said the rating reflects the Dallas-based system’s consistently strong operating performance, excellent liquidity, and very good market position.
Nationwide Children’s Hospital has an “Aa2” rating and stable outlook with Moody’s. The rating reflects the Columbus, Ohio-based system’s strong market position in pediatric services, growing statewide and national reputation, and continued expansion strategies.
Nicklaus Children’s Hospital has an “AA-” rating and stable outlook with Fitch. The rating is supported by the Miami-based system’s position as the “premier pediatric hospital in South Florida with a leading and growing market share,” Fitch said.
North Mississippi Health Services has an “AA” rating and stable outlook with Fitch. The rating reflects the Tupelo-based system’s strong cash position and strong market position with a leading market share in its primary services area, Fitch said.
Novant Health has an “AA-” rating and stable outlook with Fitch. The ratings agency said the Winston-Salem, N.C.-based system’s recent acquisition of three South Carolina hospitals from Dallas-based Tenet Healthcare will be accretive to its operating performance as the hospitals are highly profited and located in areas with growing populations and good income levels.
Oregon Health & Science University has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Portland-based system’s top-class academic, research, and clinical capabilities, Moody’s said.
Orlando (Fla.) Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the health system’s strong and consistent operating performance and a growing presence in a demographically favorable market, Fitch said.
Parkland Health has an “AA-” rating and stable outlook with Fitch. The rating reflects Fitch’s expectation that the Dallas-based system will remain the leading provider of public (safety net) services in the vast Dallas County service area, supported by its tax levy.
Presbyterian Healthcare Services has an “AA” rating and stable outlook with Fitch. The Albuquerque, N.M.-based system’s rating is driven by a strong financial profile combined with a leading market position with broad coverage in both acute care services and health plan operations, Fitch said.
Rush University System for Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Chicago-based system’s strong financial profile and an expectation that operating margins will rebound despite ongoing macro labor pressures, the rating agency said.
Saint Francis Healthcare System has an “AA” rating and stable outlook with Fitch. The rating reflects the Cape Girardeau, Mo.-based system’s strong financial profile, characterized by robust liquidity metrics, Fitch said.
Saint Luke’s Health System has an “Aa2” rating and stable outlook with Moody’s. The Kansas City, Mo.-based system’s rating was upgraded from “A1” after its merger with St. Louis-based BJC HealthCare was completed in January.
Salem (Ore.) Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the system’s dominant marketing position in a stable service area with good population growth and demand for acute care services, Fitch said.
Seattle Children’s Hospital has an “AA” rating and a stable outlook with Fitch. The rating reflects the system’s strong market position as the only children’s hospital in Seattle and provider of pediatric care to an area that covers four states, Fitch said.
SSM Health has an “AA-” rating and stable outlook with Fitch. The St. Louis-based system’s rating is supported by a strong financial profile, multistate presence and scale with good revenue diversity, Fitch said.
St. Elizabeth Medical Center has an “AA” rating and stable outlook with Fitch. The rating reflects the Edgewood, Ky.-based system’s strong liquidity, leading market position, and strong financial management, Fitch said.
Stanford Health Care has an “Aa3” rating and positive outlook with Moody’s. The rating reflects the Palo Alto, Calif.-based system’s clinical prominence, patient demand, and its location in an affluent and well-insured market, Moody’s said.
UChicago Medicine has an “AA-” rating and stable outlook with Fitch. The rating reflects the system’s strong financial profile in the context of its broad and growing reach for high-acuity services, Fitch said.
University Health has an “AA+” rating and stable outlook with Fitch. The San Antonio-based system’s outlook is based on the Bexar County Hospital District’s significant tax margin, good cost management, and strong leverage position relative to its liquidity and outstanding debt.
University of Colorado Health has an “AA” rating and stable outlook with Fitch. The Aurora-based system’s rating reflects a strong financial profile benefiting from a track record of robust operating margins and the system’s growing share of a growth market anchored by its position as the only academic medical center in the state, Fitch said.
VCU Health has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Richmond, Va.-based system’s status as one of Virginia’s leading academic medical centers and essential role as its largest safety net provider, supporting excellent patient demand at high acuity levels, Moody’s said.
Willis-Knighton Medical Center has an “AA-” rating and positive outlook with Fitch. The outlook reflects the Shreveport, La.-based system’s improving operating performance relative to the past two fiscal years combined with Fitch’s expectation for continued improvement in 2024 and beyond.
West Reading, Pa.-based Tower Health has secured more than $142 million through a debt refinancing deal with bondholders, nearly doubling its days of cash on hand to almost 60 days, a spokesperson for the health system confirmed to Becker’s.
The deal buys Tower more time to execute its financial turnaround and meet its objective of returning to profitability this fiscal year.
“This agreement secures substantial liquidity support and provides a longer-term window to advance our continued financial turnaround efforts,” Tower said in a statement shared with Becker’s. “These efforts are already gaining traction and yielding significant positive outcomes.”
As part of its turnaround efforts, Tower has closed two hospitals, laid off workers, and sold or closed multiple urgent care centers in Pennsylvania. It also will transition revenue cycle operations, patient access services, utilization review and physician advisors to Ensemble, effective July 1. The move will see about 675 Tower employees move to Ensemble.
The health system reported a $27.4 million operating loss for the nine months ending March 31, improving on the $122.8 million loss reported during the same period the prior year. Its long-term debt stands at more than $1.2 billion, according to its most recent quarterly report.
The refinancing was backed by the “vast majority” of Tower’s bondholders, a significant endorsement of its financial recovery plan, according to the nonprofit health system. Tower did not disclose a specific bondholder, but said the group represents some of the largest institutional asset managers in the U.S.
“[The refinancing deal] underscores their confidence in our strategy and affirms that we are on a positive trajectory,” according to the health system.
Tower was formed in 2017 after the formerly named Reading Health System acquired five Pennsylvania hospitals from Franklin, Tenn.-based Community Health Systems. The transaction included Reading Hospital in West Reading; Brandywine Hospital in Coatesville; Chestnut Hill Hospital in Philadelphia; Jennersville Hospital in West Grove; Phoenixville Hospital in Phoenixville; and Pottstown Hospital in Pottstown.
Tower recently closedBrandywine Hospital and Jennersville Hospital. Its plan to sell Brandywine Hospital to Philadelphia-based Penn Medicine fell through earlier this year.
The health system now includes more than 1,200 beds across its remaining hospitals as well as St. Christopher’s Hospital for Children in Philadelphia, in partnership with Drexel University, according to its website.
Here are 37 health systems with strong operational metrics and solid financial positions, according to reports from credit rating agencies Fitch Ratings and Moody’s Investors Service released in 2024.
AdventHealth has an “AA” rating and stable outlook with Fitch. The rating is based on the Altamonte Springs, Fla.-based system’s competitive market position — especially in its core Florida markets — and its financial profile, Fitch said.
Advocate Health members Advocate Aurora Health and Atrium Health have “Aa3” ratings and positive outlooks with Moody’s. The ratings are supported by the Charlotte, N.C-based system’s significant scale, strong market share across several major metro areas and good financial performance and liquidity, Moody’s said.
Avera Health has an “AA-” rating and a stable outlook with Fitch. The rating reflects the Sioux Falls, S.D.-based system’s strong operating risk and financial profile assessments, and significant size and scale, Fitch said.
Carilion Clinic has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Roanoke, Va.-based system’s scale, regional significance as a tertiary referral system with broad geographic capture, and a highly integrated physician base with a well-defined culture, Moody’s said.
Cedars-Sinai Health System has an “AA-” rating and a stable outlook with Fitch. The rating reflects the Los Angeles-based system’s consistent historical profitability and its strong liquidity metrics, historically supported by significant philanthropy, Fitch said.
Children’s Health has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Dallas-based system’s continued strong performance from a focus on high margin and tertiary services, as well as a distinctly leading market share, Moody’s said.
Children’s Hospital Medical Center of Akron (Ohio) has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the system’s large primary care physician network, long-term collaborations with regional hospitals and leading market position as its market’s only dedicated pediatric provider, Moody’s said.
Children’s Hospital of Orange County has an “AA-” rating and a stable outlook with Fitch. The rating reflects the Orange, Calif.-based system’s position as the leading provider for pediatric acute care services in Orange County, a position solidified through its adult hospital and regional partnerships, ambulatory presence and pediatric trauma status, Fitch said.
Children’s Minnesota has an “AA” rating and stable outlook with Fitch. The rating reflects the Minneapolis-based system’s strong balance sheet, robust liquidity position and dominant pediatric market position, Fitch said.
Cincinnati Children’s Hospital Medical Center has an “Aa2” rating and stable outlook with Moody’s. The rating is supported by its national and international reputation in clinical services and research, Moody’s said.
Cleveland Clinic has an “Aa2” rating and stable outlook with Moody’s. The rating reflects the system’s strength as an international brand in highly complex clinical care and research and centralized governance model, the ratings agency said.
Cook Children’s Medical Center has an “Aa2” rating and stable outlook with Moody’s. The ratings agency said the Fort Worth Texas-based system will benefit from revenue diversification through its sizable health plan, large physician group, and an expanding North Texas footprint.
El Camino Health has an “AA” rating and a stable outlook with Fitch. The rating reflects the Mountain View, Calif.-based system’s strong operating profile assessment with a history of generating double-digit operating EBITDA margins anchored by a service area that features strong demographics as well as a healthy payer mix, Fitch said.
Hoag Memorial Hospital Presbyterian has an “AA” rating and stable outlook with Fitch. The Newport Beach, Calif.-based system’s rating is supported by its strong operating risk assessment, leading market position in its immediate service area and strong financial profile,” Fitch said.
Inspira Health has an “AA-” rating and stable outlook with Fitch. The rating reflects Fitch’s expectation that the Mullica Hill, N.J.-based system will return to strong operating cash flows following the operating challenges of 2022 and 2023, as well as the successful integration of Inspira Medical Center of Mannington (formerly Salem Medical Center).
JPS Health Network has an “AA” rating and stable outlook with Fitch. The rating reflects the Fort Worth, Texas-based system’s sound historical and forecast operating margins, the ratings agency said.
Mass General Brigham has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Somerville, Mass.-based system’s strong reputation for clinical services and research at its namesake academic medical center flagships that drive excellent patient demand and help it maintain a strong market position, Moody’s said.
McLaren Health Care has an “AA-” rating and stable outlook with Fitch. The rating reflects the Grand Blanc, Mich.-based system’s leading market position over a broad service area covering much of Michigan, the ratings agency said.
Med Center Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Bowling Green, Ky.-based system’s strong operating risk assessment and leading market position in a primary service area with favorable population growth, Fitch said.
Memorial Hermann Health System has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Houston-based system’s leading and expanding market position and strong demand in a growing region, Moody’s said.
Nationwide Children’s Hospital has an “Aa2” rating and stable outlook with Moody’s. The rating reflects the Columbus, Ohio-based system’s strong market position in pediatric services, growing statewide and national reputation and continued expansion strategies.
Nicklaus Children’s Hospital has an “AA-” rating and stable outlook with Fitch. The rating is supported by the Miami-based system’s position as the “premier pediatric hospital in South Florida with a leading and growing market share,” Fitch said.
Novant Health has an “AA-” rating and stable outlook with Fitch. The ratings agency said the Winston-Salem, N.C.-based system’s recent acquisition of three South Carolina hospitals from Dallas-based Tenet Healthcare will be accretive to its operating performance as the hospitals are highly profited and located in areas with growing populations and good income levels.
Oregon Health & Science University has an “Aa3” rating and stable outlook with Moody’s. The rating reflects the Portland-based system’s top-class academic, research and clinical capabilities, Moody’s said.
Orlando (Fla.) Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the health system’s strong and consistent operating performance and a growing presence in a demographically favorable market, Fitch said.
Presbyterian Healthcare Services has an “AA” rating and stable outlook with Fitch. The Albuquerque, N.M.-based system’s rating is driven by a strong financial profile combined with a leading market position with broad coverage in both acute care services and health plan operations, Fitch said.
Rush University System for Health has an “AA-” rating and stable outlook with Fitch. The rating reflects the Chicago-based system’s strong financial profile and an expectation that operating margins will rebound despite ongoing macro labor pressures, the rating agency said.
Saint Francis Healthcare System has an “AA” rating and stable outlook with Fitch. The rating reflects the Cape Girardeau, Mo.-based system’s strong financial profile, characterized by robust liquidity metrics, Fitch said.
Saint Luke’s Health System has an “Aa2” rating and stable outlook with Moody’s. The Kansas City, Mo.-based system’s rating was upgraded from “A1” after its merger with St. Louis-based BJC HealthCare was completed in January.
Salem (Ore.) Health has an”AA-” rating and stable outlook with Fitch. The rating reflects the system’s dominant marketing positive in a stable service area with good population growth and demand for acute care services, Fitch said.
Seattle Children’s Hospital has an “AA” rating and a stable outlook with Fitch. The rating reflects the system’s strong market position as the only children’s hospital in Seattle and provider of pediatric care to an area that covers four states, Fitch said.
SSM Health has an “AA-” rating and stable outlook with Fitch. The St. Louis-based system’s rating is supported by a strong financial profile, multistate presence and scale with good revenue diversity, Fitch said.
St. Elizabeth Medical Center has an “AA” rating and stable outlook with Fitch. The rating reflects the Edgewood, Ky.-based system’s strong liquidity, leading market position and strong financial management, Fitch said.
Stanford Health Care has an “Aa3” rating and positive outlook with Moody’s. The rating reflects the Palo Alto, Calif.-based system’s clinical prominence, patient demand and its location in an affluent and well insured market, Moody’s said.
UChicago Medicine has an “AA-” rating and stable outlook with Fitch. The rating reflects the system’s strong financial profile in the context of its broad and growing reach for high-acuity services, Fitch said.
University of Colorado Health has an “AA” rating and stable outlook with Fitch. The Aurora-based system’s rating reflects a strong financial profile benefiting from a track record of robust operating margins and the system’s growing share of a growth market anchored by its position as the only academic medical center in the state, Fitch said.
Willis-Knighton Medical Center has an “AA-” rating and positive outlook with Fitch. The outlook reflects the Shreveport, La.-based system’s improving operating performance relative to the past two fiscal years combined with Fitch’s expectation for continued improvement in 2024 and beyond.
Steward Health Care’s Chapter 11 bankruptcy filing onMay 6, 2024, brought back bad memories of another large health system bankruptcy.
On July 21, 1998, Pittsburgh-based Allegheny Health and Education Research Foundation (AHERF) filed Chapter 11. AHERF grew very rapidly, acquiring hospitals, physicians, and medical schools in its vigorous pursuit of scale across Pennsylvania. Utilizing debt capacity and spending cash, AHERF quickly ran out of both, defaulted on its obligations, and then filed for bankruptcy. It was one of the largest bankruptcy filings in municipal finance and the largest in the rated not-for-profit hospital universe.
Steward Health Care is a for-profit, physician-owned hospital company, but its long-standing roots were in faith-based not-for-profit healthcare. Prior to the acquisition by Cerberus Capital Management in 2010, Caritas Christi Health Care System was comprised of six hospitals in eastern Massachusetts. Caritas was a well-regarded health system, providing a community alternative to the academic medical centers in downtown Boston. Over the next 14 years, Steward grew rapidly to 31 hospitals in eight states, most recently bolstered through an expansive sale-leaseback structure with a REIT. Per the bankruptcy filings, the company reported $9 billion in secured debt and leases on $6 billion of revenue.
Chapter 11 bankruptcy filings in corporate America are a means to efficiently sell assets or a path to re-emergence as a new streamlined company. A quick glance at Steward’s organizational structure shows a dizzying checkerboard of companies and LLCs that will require a massive untangling. Further, its capital structure includes both secured debt for operations and a separate and distinct lease structure for its facilities, and in bankruptcy, that signals significant complexity. Bankruptcy filings in not-for-profit healthcare are less common, although it is surprising that the industry did not see an increase after the pandemic. Not-for-profit hospitals that are in distress seem to hang on long enough to find a buyer, gain increased state funding, attain accommodations on obligations, or find some other escape route to avoid a payment default or filing.
Details regarding Steward’s undoing will unfold in the coming weeks as it moves through an auction process. But there are some early takeaways the not-for-profit industry can learn from this:
Remain essential in your local market. Hospitals must prove their value to their constituents, including managed care payers, especially in competitive urban markets, as Steward may have learned in eastern Massachusetts and Miami. Prior strategies of making a margin as an out-of-network provider are no longer viable as patients must shoulder more of the financial burden. Simply put, your organization should be asking one question: does a managed care plan need our existing network to sell a product in our market? If the answer is no, you need to develop strategies that make your hospital essential.
Embrace financial planning for long-term viability. Without it, a hospital or health system will be unable to afford the capital spending it needs to maintain attractive, patient-friendly, state-of-the art facilities or absorb long-term debt to fund the capital. Annual financial planning is more than just a trendline going forward. The scenarios and inputs must be well-founded, well-grounded in detail, and based on conservative assumptions. Increasing attention has to be paid to disrupters, innovators, specialized/segmented offerings, and expansion plans of existing and new competitors. Investors expect this from not-for-profit borrowers. Higher-performing hospitals and health systems of all sizes do this well.
Build capital capacity through improved cash flow. It is undoubtedly clear that Steward, like AHERF, was unable to afford the capital and debt they thought they could, either through flawed financial planning of its future state or, more concerning, the complete absence of it. Or they believed that rapid growth would solve all problems, not detailed financial planning, the use of benchmarks, or a sharp focus on operations. Increasing that capacity through sustained financial performance will allow an organization to de-leverage and build capital capacity.
When the case studies are written about Steward, a fact pattern will be revealed that includes the inability or unwillingness to attain synergies as a system, underspending on facility capital needs given a severe liquidity crunch, labor challenges, and a rapid payer mix shift.
Underlying all of this will undoubtedly be a failure of governance and leadership as we saw with AHERF. It will also likely indicate that one of the most precious assets healthcare providers may have is the management bandwidth to ensure strategic plans are appropriately made, tested, monitored, and executed.
While Steward and AHERF may be held up as extreme cases, not-for-profit hospital governance must continue to focus on checks-and-balances of management resources. Likewise, management must utilize benchmarks, data, and strong financial planning, given the challenges the industry faces.
For several decades, the economics, demographics, and technology of healthcare have been fueling a trend toward closure of inpatient hospitals.
In the past ten years, from 2014 through 2023, 229 hospitals closed without being converted into other facilities, while only 118 new hospitals opened, according to data provided by MedPAC in its March 2020 and March 2024 reports to Congress.
Rural closures have generated significant concern—justifiably so due to the risk of reduced access to care. Of the 229 hospitals that closed in the past decade, 68 were rural, with an additional 48 closing and converting into other types of care facilities, according to the Sheps Center for Health Services Research at the University of North Carolina. Although the number of rural closures is high, the numbers also show that the issue is by no means confined to rural areas.
The circumstances leading to hospital closures are as serious as they are familiar: rising operating expenses, labor shortages, shifts from inpatient to outpatient care, high-cost technology, flattening reimbursement, an aging population, and population migration.
At the same time these forces are driving some hospitals toward financial distress, they can also create clinical and even safety concerns—including inpatient volume that is reduced to the point where quality may be compromised and an inability to maintain aging physical plants.
These forces are inexorable. Attempting to maintain the status quo is simply not a viable strategy. Unfortunately, a desire to protect the status quo is often what health systems encounter when attempting to close a hospital. This impulse toward protectionism is understandable. Community groups are concerned about losing access to care. Labor groups are worried about losing jobs. Political leaders are concerned about both, and about the continued economic strength of their localities.
In too many cases, these understandable concerns have the unintended consequence of keeping open a hospital that no longer effectively serves its community. In other cases, they make the process of necessary change unnecessarily painful and protracted.
The challenge for healthcare executives and community leaders alike is to figure out a new path forward—one that creates a clinically, operationally, and economically viable approach to providing needed access to high quality care but offers an alternative to complete hospital closure or to a facility continuing to exist in a state of distress.
Recently, we came across a man named Scott Keller, who has spent the past 28 years shaping and implementing what looks to me like a creative and workable path forward for many communities facing hospital closures.
The intellectual underpinning of Scott’s approach is to combine community health, economic development, and neighborhood planning. Through that lens, Scott and his team at Dynamis look to transform hospitals that are no longer viable into community hubs that he calls “Healthy Villages®.”
These hubs address a range of community needs that include some traditional healthcare services, but also social and other community services. They bring these services together—under one roof and extending into the neighborhood—into a careful system that creates an opportunity to develop new care models built on the foundation of value-based, population-based care, prioritizing health, prevention, and elimination of disparities and barriers to care. The aim is to treat the whole person in a walkable, thriving community.
At a macro level, Scott’s approach involves consolidating treatment services into a fraction of the square footage of the existing facility and leasing the remaining space to partners focused on social determinants of health, much like a successful multifaceted retail environment creates an excellent consumer experience.
From there, the hub integrates with other neighborhood partners such as senior housing providers, financial institutions for social-impact financing, and education providers to support workforce training.
Scott explained to us that the approach can be applied in settings from challenged urban neighborhoods to rural towns, at scales from neighborhoods to full towns, and in concert with initiatives such as a health system’s service-line planning. In addition, some of these hubs have unique sources of funding that support the community, funding not typically available to a traditional hospital.
Perhaps the most attractive quality of Scott’s approach is to shift the conversation about a distressed hospital from the binary close-or-don’t close to a thoughtful consideration of what it means to deliver healthcare in a setting that has difficulty supporting a particular hospital.
In doing so, Scott helps us focus on the true issue at hand. America’s economic, demographic, and technological forces are aligned in certain markets to challenge the adequacy of the traditional hospital. The question is not whether this group of hospitals will change, but how they will change.
In too many instances and too many locations, that hospital change becomes an enemy to be fought against, resulting in a transformation that is protractedly painful and that often ends poorly for all concerned. Scott’s approach is a welcome example of how organizations and communities, rather than clinging to the status quo, can apply creative thinking, broad participation, and systematic planning to shape a future that may turn out to be not an enemy, but a real and lasting improvement.
Days cash on hand is one of the most important metrics in hospital credit analysis. The ratio calculates an organization’s unrestricted cash and investments relative to daily operating expenses.
Here’s a computation commonly used to calculate days cash on hand:
Math aside, let’s unpack what days cash on hand really tells us. Days cash on hand gives an indication of a hospital’s flexibility and financial health. Essentially, it tells us how long a hospital could continue to operate if cash flow were to stop. From a ratings perspective, the higher the days cash, the better, to create a cushion or rainy-day fund for unexpected events.
While the sheer abatement of cash flow feels like a doomsday scenario, we don’t have to look far back to see examples. The shutdown in the early days of Covid and the recent Change Healthcare cyberattack are examples of events that can materially impact cash flow. While these may be considered extreme, there are plenty of more common events that can disrupt cash flow, including a delay in supplemental funding, an IT installation, a change in Medicare fiscal intermediary, an escalation in construction costs, or the bankruptcy of a payer.
Size and diversified business enterprises can impact days cash on hand. For example, small hospitals with outsized cash positions relative to operations often report a dizzying level of days cash on hand. Health systems with wholly owned health plans often show lower days cash when compared to like-sized peers without health plans. Analysts will also review a hospital’s cash-to-debt ratio, which is an indication of leverage and compares absolute unrestricted cash to long-term obligations. Cash-to-debt creates a more comparable ratio across the portfolio.
In the years leading up to the pandemic, the days cash on hand median increased steadily as the industry went through a period of stable financial performance and steady equity market returns. Hospitals took advantage of an attractive debt market to fund large capital projects or reimburse for prior capital spending. The median crested over 200 days. As discussed during our March 20, 2024, rating agency webinar, days cash median for 2023 is expected to decline or remain flat at best, not because of an increase in capital spending or deficit operations, but because daily expenses (mainly driven by labor) will grow faster than absolute cash. Expenses will outrun the bear, so to speak.
Days cash on hand will remain a pillar liquidity ratio for the industry, but equally important is the concept of liquidity. Days cash on hand doesn’t tell the whole story regarding liquidity. A hospital may compute that it has, say, 200 days cash on hand, but that calculation is based on total unrestricted cash and investments, which usually includes long-term investment pools. A sizable portion of that 200 days may not be accessible on a daily basis.
Recall that during the 2008 liquidity crisis, many hospitals had large portions of their unrestricted investment pools tied up in illiquid investments. When you needed it the most, you couldn’t get it. 2008 was a watershed moment that starkly showed the difference between wealth and liquidity and the growing importance of the latter. Days cash on hand didn’t necessarily mean “on hand.” Many hospitals scrambled for liquidity, which came in the form of expensive bank lines because liquidating equity investments in a down market would come at a huge cost.
Nearly overnight, daily liquidity became a fundamental part of credit analysis.
While the events were different, Covid and Change Healthcare followed the same fact pattern: crisis occurred, cash flow abated, and hospitals scrambled for liquidity, drawing on lines of credit to fund operating needs. Within a quick minute healthcare went “back to the future,” and undoubtedly, there will be another liquidity crisis ahead.
Rating reports now include information on investment allocation and diversification within those investments, and report new ratios such as monthly liquidity to total cash and investments. A hospital with below average days cash on hand or cash-to-debt may receive more attention in the rating report regarding immediately accessible funds.
Irrespective of a high or low cash position or rating category, providing rating analysts with a schedule highlighting where management would turn to when liquidity is needed would be well received. For example, do you draw on lines of credit, hit depository accounts, pause capital, extend payables, or liquidate investments, and in what order? Some health systems are taking this a step further with an in-depth sophisticated analysis to quantify their operating risks and size their liquidity needs accordingly, which we call Strategic Resource Allocation. This analysis would boost an analyst’s confidence in management’s preparedness for the next crisis with the segmenting of true cash “on hand.” It would also help ensure that, when the next crisis arrives, management will know where to turn to maintain liquidity and meet daily cash needs.
HENRY KOTULA 