S&P Global Ratings on Wednesday upgraded its view on the nonprofit healthcare sector to stable. It had been at negative since March 2020, a view that was affirmed in January.
Analysts said the change results from coronavirus vaccination rates and decreasing COVID-19 cases as well as a drop in the unemployment rate that should reduce payer mix shakeup. They also pointed to generally healthy balance sheets across the sector.
Headwinds remain, most notably labor expenses as burnout among staff was heavily exacerbated by the pandemic. Increased salaries and benefit expenses will dampen margins going forward, according to the report.
The change is another sign for providers that their financial situation is on a rather swift recovery from the upheaval caused by the pandemic. Although some facilities, especially those that are smaller and in rural areas, are certainly still struggling, that was the case before COVID-19 as well.
Most nonprofit health systems reported first-quarter results that showed improved volumes and investment returns. Some are still sporting more than a year’s worth of cash on hand.
The S&P analysts warned, however, that potential COVID-19 outbreaks this fall would be a setback. That remains a concern with some parts of the country lagging in vaccination rates and the increasing prevalence of more contagious COVID-19 variants.
Other risks include the end of enhanced federal reimbursement and the return of the Medicare sequester cuts when the public health emergency ends, which is expected to be after the end of this year.
But the analysts said agile management teams should be able to combat these challenges.
“[T]o the extent that the pandemic has enabled faster decision making and allowed management teams to pivot and identify new opportunities for expense base restructuring and revenue enhancement, we believe these risks are manageable within our view of the stable sector view,” according to the report.
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.
The signs of progress are encouraging, but the metrics are still down slightly when compared to last month.
Slowly, the financial health of the nation’s healthcare institutions are improving. Hospitals and health systems continued to see performance improvements in April compared to the devastating losses experienced in the early months of the COVID-19 pandemic.
Hospital margins, volumes, and revenues were up across most performance metrics, both year-to-date and year-over-year, but were down compared to March, according to the latest issue of Kaufman Hall’s National Hospital Flash Report. There was no explicit reason given for the dip, but any number of factors small and large could play into the results. It’s possible that clearer trend lines will develop over time.
WHAT’S THE IMPACT?
While any signs of progress are encouraging, the April results draw a clear contrast to the severity of record-low performance seen during the first two months of the pandemic in 2020, rather than strong overall performance so far this year.
Operating margin, for example, rose 101.9% (or 8.6 percentage points) compared to January-April 2020, not including federal Coronavirus Aid, Relief, and Economic Security Act funding. With the funding, operating margin was up 90.6% year-to-date, or 6.9 percentage points.
Operating margin was up 113.1% (39.3%) without CARES and 109.5% (21.4%) with CARES, compared to the first full month of the pandemic in April 2020, when nationwide shutdowns and broad restrictions on outpatient procedures caused operating margins to plummet 282% year-over-year.
April 2021 hospital margins, however, remained relatively thin. The median Kaufman Hall hospital operating margin index was 2.4% for the month, not including CARES. Even with the funding, it was 3.3%.
When it came to volumes, hospitals saw them increase across most metrics compared to 2020 levels, but decrease slightly compared to March. Adjusted discharges were up 5.9% year-to-date and jumped 66.4% year-over-year, while adjusted patient days rose 10% year-to-date and 64.8% year-over-year. Both metrics fell 1% month-over-month.
Emergency department visits were mixed, falling 7% compared to the first four months of 2020, but rising 57.2% year-over-year and 5.3% month-over-month. Operating room minutes were down 3.6% from March, but increased 26.1% year-to-date, and shot up 189.2% compared to April 2020, when COVID-19 abruptly halted most outpatient procedures.
Revenues followed a similar pattern, with gross operating revenue (not including CARES) up 16.7% year-to-date and 71.8% year-over-year, but down 2.5% compared to the prior month. Inpatient revenue rose 10.6% year-to-date and 37.1% year-over-year, but was down 1.9% month-over-month. Outpatient revenue rose 20.3% year-to-date, jumped 114.8% compared to April 2020, but fell 2% from March.
Total expenses continued to increase both year-to-date and year-over-year, but saw moderate decreases month-over-month. Total expense was up 6.6% year to date and 13.1% year over year. Total labor expense increased 6.1% year-to-date and 9.4% year-over-year, and total nonlabor expense rose 7% year-to-date and 16.3% year-over-year.
Compared to March, though, all three metrics were down about 3%. Expense results were mixed when adjusted for the month’s volumes. Total expense per adjusted discharge, for example, increased 2% compared to January-April 2020, but fell 32.3% from April 2020 and 2% from March.
THE LARGER TREND
Despite the ongoing pandemic, the 2021 financial outlook for the global healthcare sector is mostly positive, as strong demand for products and services – including those related to COVID-19 – will more than offset lingering pressures from the public health emergency, Moody’s Investors Service found in December.
The demand will remain strong, largely due to aging populations, the improvement in access and the introduction of new and innovative products. There is one caveat: steadily rising healthcare expenditures, which will cause payers to continue to restrict utilization and lower prices.
In October, Moody’s found that owning a public hospital during the COVID-19 pandemic carriedoperational risk, which will compound the fiscal and credit difficulties facing many large urban counties across the U.S.
Whether recovery from the coronavirus this year is relatively rapid or relatively slow, America’s hospitals will face another year of struggle to regain their financial health.
Sutter Health is launching a “sweeping review” of its finances and operations due to the pandemic’s squeeze on the system in 2020, which led to a $321 million operational loss, the system said Thursday.
The giant hospital provider in Northern California said it will take “several years to fully recover,” adding that it plans to restructure and even close some programs and services that attract fewer patients, and will reassign those employees to busier parts of its network.
Sutter, which spent $431 million to modernize its facilities last year, is also reassessing its future capital investments due to its current financial situation.
The pandemic “exacerbated” existing challenges for the provider, including labor costs, Sutter said.
Expenses again outpaced revenue in 2020 and Sutter fears the trajectory is “unsustainable.”
In 2020, Sutter generated revenue of $13.2 billion which was eclipsed by $13.5 billion in expenses, which was actually lower than its total expenses reported in 2019.
Last year, the system invested heavily to prepare for the pandemic, buying up personal protective equipment and other supplies all while volumes declined. Sutter estimates it spent at least $121 million on COVID-19 supplies, which does not include outside staffing costs.
Sutter said labor costs represented 60% of its total operating expenses, blaming high hospital wage indexes in Northern California, which it said are among the priciest in the country.
Still, Sutter was able to post net income of $134 million thanks in part to investment income, which was also deflated compared to the year prior.
Volume has not rebounded to pre-pandemic levels, the system said.
Admissions, emergency room visits and outpatient revenues all fell year over year, according to figures in Sutter’s audited financial statements.
Other major health systems were pinched by the pandemic but were able to post a profit, including Kaiser Permanente.
“For the most part providers were dependent on that CARES funding. I think they would have been in the red or break even without it,” Suzie Desai, a senior director at S&P Global Ratings, said.
The pandemic weighed heavily on the financial performance of not-for-profit hospitals in 2020, but some of the larger health systems remained profitable despite the upheaval — in large part thanks to substantial federal funding earmarked to prop up providers during the global health crisis.
Industry observers have been closely watching to see how health systems ultimately fared in 2020. Now, with the fiscal-year ended and accounted for, analysts say the $175 billion in federal funds was crucial for providers’ bottom lines.
“Without the stimulus funding, it is very likely we would have seen more issuers [hospitals/health] systems experience either lower profitable margins, or outright losses from operations,” Kevin Holloran, senior director of U.S. public finance for Fitch Ratings, said.
Still, the pandemic put a squeeze on nonprofit hospital margins last year, according to a recent Moody’s report that showed the median operating margin was 0.5% in 2020 compared to 2.4% in 2019.
The first half of the year hit providers especially hard as volumes fell drastically, seemingly overnight. Revenue plummeted alongside the volume declines as the nation paused lucrative elective procedures to preserve medical resources.
But as the year wore on, the outlook improved as some volumes returned closer to pre-pandemic levels. At the same time, health systems worked to cut expenses to mitigate the financial strain.
Still, some health systems did post operational losses even with the federal funds meant to help them. Moody’s found that 42% of 130 hospitals surveyed posted an operating loss, an increase from 23% the year prior. Yet, the 2019 survey included more hospitals, a total of 282.
Sutter Health, the Northern California giant, reported an operating loss for 2020 and said it was launching a “sweeping review” of its finances as the pandemic exacerbated existing challenges for the provider. Washington-based Providence also reported an operating loss for 2020. However, both Sutter and Providence were able to post positive net income thanks in large part to investment gains.
Investment income can aid nonprofit operators even when core operations are stunted like during 2020. Though, initially, the pandemic put stress on the stock market as uncertainty around the virus and its duration ballooned. The stock market took a dive and it was reflected in some six-month financials as both operations and investments took a hit.
“COVID and the stimulus is (hopefully) a once in a lifetime disruption of operations,” Holloran said, who noted analysts have been trying to assess whether the top line losses can be placed squarely on COVID-19. If that’s the case, analysts are typically more apt to keep the provider’s existing rating.
“For the most part providers were dependent on that CARES funding. I think they would have been in the red or break even without it,” Suzie Desai, a senior director at S&P Global Ratings, said.
For example, Arizona’s Banner Health would have posted an operating loss without federal relief, according to their financial reports. Banner Health was able to work its way back to black after it reported a loss through the first six months of the year. The same was true for Midwest behemoth Advocate Aurora.
The providers that were able to weather the storm of the pandemic tended to be integrated systems that had a health plan under their umbrella.
Kaiser Permanente ended the year with both positive operating and net income and returned relief funds it received.
“The integrated providers, yeah, were one group that just had a natural hedge with the insurance premiums still coming in,” Desai said.
Still, the hospital lobby is hoping to secure more funding for its members as the threat of the virus is still present even amid large scale efforts to vaccinate a majority of Americans to reach a blanket of protection from the novel coronavirus and its variants.
Doctors and health systems with a significant portion of risk-based contracts weathered the pandemic better than their peers still fully tethered to fee-for-service payment. Lower healthcare utilization translated into record profits, just as it did for insurers.
We’re now seeing an increasing number of health systems asking again whether they should enter the health plan business—levels of interest we haven’t seen since the “rush to risk” in the immediate aftermath of the passage of the Affordable Care Act a decade ago.
The discussions feel appreciably different this time around (which is a good thing, since many systems who launched plans in the prior wave had trouble growing and sustaining them). First, systems are approaching the market this time with a focus on Medicare Advantage, having seen that growing a base of covered lives with their networks is much easier than starting with the commercial market, where large insurers, particularly incumbent Blues plans, dominate the market, and many employers are still reticent to limit choice.
But foremost, there is new appreciation for the scale needed for a health plan to compete. In 2010, many executives set a goal of 100K covered lives as a target for sustainability; today, a plan with three times that number is considered small. Now many leaders posit that regional insurers need a plan to get to half a million lives, or more. (Somehow this doesn’t seem to hold for insurance startups: see the recent public offerings of Clover Health and Alignment Health, who have just 57K and 82K lives, respectively, nationwide.)
We’re watching for a coming wave of health system consolidation to gain the financial footing and geographic footprint needed to compete in the Medicare Advantage market, and would expect traditional payers to respond with regional consolidation of their own.
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.
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.
Mercy Hospital & Medical Center in Chicago has secured a nonbinding purchase agreement with Insight Chicago just months before it is slated to close its doors, according to the Chicago Tribune.
Under terms of the deal, still being negotiated, Insight Chicago would operate Mercy Hospital as a full-service, acute care facility. Insight Chicago is a nonprofit affiliated with a Flint, Mich.-based biomedical technology company.
The deal is subject to regulatory approval, but if it goes through, it would keep the 170-year-old safety-net hospital open.
Securing a potential buyer is the latest in a series of events related to the Chicago hospital.
On Feb. 10, Mercy filed for bankruptcy protection, citing mounting financial losses and losses of staff that challenged its ability to provide safe patient care.
The bankruptcy filing came just a few weeks after the Illinois Health Facilities and Services Review Board rejected a plan from Mercy’s owner, Trinity Health, to build an outpatient center in the neighborhood where it planned to close Mercy. The same board unanimously rejected Livonia, Mich.-based Trinity’s plan to close the hospital in December.
The December vote from the review board came after months of protests from physicians, healthcare advocates and community organizers, who said that closing the hospital would create a healthcare desert on Chicago’s South Side.
Mercy said that until the pending deal with Insight Chicago is signed and approved by regulators, it still plans to close the facility. If the agreement is reached before the May 31 closure, Mercy will help transition services to Insight Chicago, according to theChicago Sun-Times.
Insight Chicago told local NPR affiliateWBEZthat it has a difficult task ahead to build community trust and address the financial issues that have plagued the Chicago hospital.
“I think the big main point we want to understand between now and then is the community needs to build trust with the community, and I think to build trust we have to tell the truth and be sincere,” Atif Bawahab, chief strategy officer at Insight, told WBEZ. “And there’s a reality of the situation as to why [the hospital] is going bankrupt and why several safety net hospitals are struggling.”
In its bankruptcy filing, Mercy said its losses have averaged about $5 million per month and reached $30.2 million for the first six months of fiscal year 2021. The hospital also said it has accumulated debt of more than $303.2 million over the last seven years, and the hospital needs more than $100 million in upgrades and modernizations.
West Reading, Pa.-based Tower Health is looking for a partner to buy the entire system, which comprises six hospitals, according to the Reading Eagle.
“We are compelled to pursue every possible avenue available to protect and preserve the future of care at all of our hospitals and facilities,” Tower said in a statement to The Philadelphia Inquirer on Feb. 26. “As part of this process, we will examine potential partnerships for the entire Tower Health system with like-minded health systems that share our same values and passion for clinical excellence.”
The health system had previously said it was looking for buyers for its hospitals, with the exception of its flagship facility, Reading Hospital in West Reading, according to the Inquirer.
On March 1, Tower Health was hit with a three-notch credit downgrade by Fitch Ratings. The credit rating agency said its long-term “B+” rating and negative outlook for the system reflect significant ongoing financial losses from the COVID-19 pandemic and operational challenges following the 2017 acquisition of five hospitals.
S&P lowered its rating on Tower Health by two notches, to “BB-” from “BB+,” on March 2.
Tower Health had operating losses of more than $415 million in fiscal year 2020, and it expects an operating loss of about $160 million in fiscal 2021, according to Fitch.