Health system finances looking up

Fitch Ratings Senior Director Kevin Holloran dubbed 2022 the worst operating year ever and most nonprofit health systems reported large losses. However, the losses are shrinking and some systems have even reported gains during 2023 so far.

Cleveland Clinic reported $335.5 million net income for the first quarter of the year, compared with a $282.5 million loss over the same period in 2022. The health system reported revenue of $3.5 billion for the quarter. Cleveland Clinic has 321 days cash on hand, which puts it in a strong position for the future.

Boston-based Mass General Brigham reported $361 million gain for the second quarter ending March 31, which is up from a $867 million loss in the same period last year. The health system reported quarterly revenue jumped 11 percent year over year to $4.5 billion. The system’s quarterly loss on operations was down significantly this year, hitting $8 million, compared to $183 million last year.

Renton, Wash.-based Providence reported first quarter revenues were up 5.1 percent in 2023 to $7.1 billion, and operating loss is also moving in the right direction. The system reported $345 million operating loss in the first quarter of 2023, down from $510 million last year.

All three systems cited ongoing labor shortages and labor costs as a challenge, but are working on initiatives to reduce expenses. Cleveland Clinic and Mass General Brigham reported operating margin improvement to nearly positive numbers.

Kaiser Permanente, based in Oakland, Calif., also reported operating income at $233 million for the first quarter of the year, an increase from $72 million operating loss over the same period last year. The system is focused on advancing value-based care for the remainder of the year and its health plan grew more than 120,000 members year over year.

Even more regional systems are stemming their losses. SSM Health, based in St. Louis, went from a $57.4 million loss for the first quarter of 2022 to $16.5 million quarterly loss this year. Revenue increased 13.3 percent to $2.5 billion for the quarter, with increased labor expenses and inflation on supply costs continuing to weigh on the system.

UCHealth in Aurora, Colo., also reported a first quarter income of $61.8 million and revenue of more than $5 billion.

Not every system is seeing losses decline. Chicago-based CommonSpirit Health, which reported larger operating losses in the first quarter year over year, hitting $658 million and $1.1 billion for the nine-month’s end March 31. The system was able to reduce contract labor costs, but still finds hiring a challenge and spent time last year recovering from a cybersecurity incident.

Hospitals face a long road to financial recovery from the pandemic as inflation persists and labor shortages become the norm, but movement in the right direction is welcome.

The End of the Pandemic Health Emergency is Ill-timed and Short-sighted: The Impact will further Destabilize the Health Industry

The national spotlight this week will be on the debt ceiling stand-off in Congress, the end of Title 42 that enables immigrants’ legal access to the U.S., the April CPI report from the Department of Labor and the aftermath of the nation’s 199th mass shooting this year in Allen TX.

The official end of the Pandemic Health Emergency (PHE) Thursday will also be noted but its impact on the health industry will be immediate and under-estimated.

The US Centers for Disease Control and Prevention (CDC) logged more than 104 million COVID-19 cases in the US as of late April and more than 11% of adults who had COVID-19 currently have symptoms of long COVID. It comes as the CDC say there’s a 20% chance of a Pandemic 2.0 in the next 2-5 years and the current death toll tops 1000/day in the U.S.

The Immediate impact:

The official end of the PHE means much of the cost for treating Covid will shift to private insurers; access to testing, vaccines and treatments with no out-of-pocket costs for the uninsured will continue through 2024. But enrollees in commercial plans, Medicare, Medicaid and the Children’s Health Insurance Program can expect more cost-sharing for tests and antivirals. 

That means higher revenues for insurers, increased out of pocket costs for consumers and more bad debt for hospitals and physicians.

At the state level, Medicaid disenrollment efforts will intensify to alleviate state financial obligations for Covid-related health costs. In tandem, state allocations for SNAP benefits used by 1 in 4 long-covid victims will shrink as budget-belts tighten lending to hunger cliff.  

That means less access to health programs in many states and more disruption in low-income households seeking care.

The Under-estimated Impact:

The end of the PHE enables politicians to shift “good will” toward direct care workers, home and Veteran’s health services and away from hospitals and specialty medicine who face reimbursement cuts and hostile negotiations with insurers. The April 18, 2023 White House Executive Order which enables increased funding for direct care workers called for prioritization across all federal agencies. Notably, in the PHE, hospitals received emergency funding to treat the Covid-19 patients while utilization and funding for non-urgent services was curtailed. Though the Covid-19 population is still significant, funding for hospitals is unlikely in lieu of in-home and social services programs for at risk populations.

A second unknown is this: As the ranks of the uninsured and under-insured swell, and as affordability looms as a primary concern among voters and employers, provider unpaid medical bills and “bad debt” increases are likely to follow.

Hostility over declining reimbursement between health insurers and local hospitals and medical groups will intensify while the biggest drug manufacturers, hospital systems and health insurers launch fresh social media campaigns and advocacy efforts to advance their interests and demonize their foes. 

Loss of confidence in the system and a desire for something better may be sparked by the official end of the PHE. And it’s certain to widen antipathy between insurers and hospitals.

My take:

In this month’s Health Affairs, DePaul University health researchers reported results of their analysis of the association between hospital reimbursement rates and insurer consolidation:

“Our results confirm this prior work and suggest that greater insurer market power is associated with lower prices paid for services nationally. A critical question for policy makers and consumers is whether savings obtained from lower prices are passed on in the form of lower premiums. The relationship to premiums is theoretically ambiguous. It is possible that insurers simply retain the savings in the form of higher profits.”

What’s clear is health insurers are winners and providers—especially hospitals and physicians—are likely losers as the PHE ends. What’s also clear is policymakers are in no mood to provide financial rescue to either.

In the weeks ahead as the debt ceiling is debated, the Federal FY 2024 budget finalized and campaign 2024 launches, the societal value of the entire health system and speculation about its preparedness for the next pandemic will be top of mind.

For some—especially not-for-profit hospitals and insurers who benefit from tax exemptions in favor of community health obligations– it requires rethinking of long-term strategies to serve the public good. And it necessitates their Boards to alter capital and operating priorities toward a more sustainnable future.

The pandemic exposed the disconnect between local health and human services programs and inadequacy of local, state and federal preparedness Given what’s ahead, the end of the Pandemic Health Emergency seems ill-timed and short-sighted: the impact will further destabilize the health industry.


PS: Saturday, the Allen Premium Outlets, (Allen, TX) was the site of America’s 199th mass shooting this year:

this time, 8 innocents died and 7 remain hospitalized, 4 in critical condition. Sadly, it’s becoming a new normal, marked by public officials who offer “thoughts and prayers” followed by calls for mental health and gun controls. Local law enforcement is deified if prompt or demonized if not. But because it’s a “new normal,” the heroics of EMS, ED and hospitals escapes mention. Medical City Healthcare is where 2 of the 8 drew their last breaths while staff labored to save the other 7. At a time when hospitals are battered by bad press, they deserve recognition for work done like this every day.

The extraordinary decline in not-for-profit healthcare debt issuance

Last month, Eric Jordahl, Managing Director of Kaufman Hall’s Treasury and Capital Markets practice, blogged about the dangers of nonprofit healthcare providers’ extremely conservative risk management in today’s uncertain economy.

Healthcare public debt issuance in the first quarter of 2023 was down almost 70 percent compared to the first quarter of 2022. While not the only funding channel for not-for-profit healthcare organizations,

the level of public debt issuance is a bellwether for the ambition of the sector’s capital formation strategies.

While health systems have plenty of reasons to be cautious about credit management right now, it’s important not to underrate the dangers of being too risk averse. As Jordahl puts it: “Retrenchment might be the right risk management choice in times of crisis, but once that crisis moderates that same strategy can quickly become a risk driver.” 

The Gist: Given current market conditions, there are a host of good reasons why caution reigns among nonprofit health systems, but this current holding pattern for capital spending endangers their future competitiveness and potentially even their survival. 

Nonprofit systems aren’t just at risk of losing a competitive edge to vertically integrated payers, whom the pandemic market treated far more kindly in financial terms, but also to for-profit national systems, like HCA and Tenet, who have been flywheeling strong quarterly results into revamped growth and expansion plans. 

Health systems should be wary of becoming stuck on defense while the competition is running up the score.

California lawmakers pass loan program for financially distressed hospitals

Last week, California’s legislature passed a bill establishing the Distressed Hospital Loan Program, which will dole out $150M in interest-free emergency loans to struggling nonprofit hospitals in the state which meet specific eligibility criteria, including operating in an underserved area and serving a large share of Medicaid beneficiaries. A combination of state agencies will establish a specific methodology for selection, but hospitals that are part of a health system with more than two separately licensed hospital facilities will be ineligible.

Hospitals receiving loans must provide a plan for how they will use the loans to achieve financial sustainability, and must pay back the money within six years.

The Gist: With twenty percent of the state’s hospitals at risk of shuttering, California lawmakers are hoping to provide the most vulnerable hospitals an alternative to either closure or consolidation, an example other states may follow. But unlike the Paycheck Protection Program loans that shored up businesses through the pandemic’s initial disruption, the outlook for small, struggling, independent hospitals isn’t expected to improve in coming years, even if the economy recovers. 

Whether these loans provide lifelines or merely serve as Band-Aids on an untenable situation will depend on whether recipient hospitals can use them to restructure their operating models to absorb increased labor costs amid stagnating volumes and commercial reimbursement.

If these loans aren’t used for transformation, they will only delay the inevitable: more closures, and more mergers to find shelter in scale.

The Balance Sheet Bridge

Current Funding Environment

The healthcare financings that came in the past couple of weeks generally did well. Maturities seemed to do better than put bonds, and it remains important to pay attention to couponing and how best to navigate a challenging yield curve. But these are episodic indicators rather than trends, given that the scale of issuance remains muted. Other capital markets—like real estate—are becoming more active and offer competitive funding and different credit considerations relative to debt market options. Credit management continues to be the main driver of low external capital formation, but those looking for outside funding should spend time up front considering the full array of channels and structures.

This Part of the Crisis

And now it’s official. After JPMorgan acquired First Republic Bank—with a whole lot of help from the Federal Deposit Insurance Corporation—CEO Jamie Dimon declared, “this part of the crisis is over.” Not sure regional bank shareholders would agree, but from Mr. Dimon’s perspective the biggest bank got bigger, which made it a good day.

Last week the Federal Reserve raised rates another 25 basis points and the expectation (hope) seems to be that the Fed has reached the peak of its tightening cycle or will at least pause to see if constrictive forces like higher rates and regional bank balance sheet deflation slow activity enough to bring inflation back to the 2.0% Fed target. Assuming this is a pause point, it makes sense to check in on a few economic and market indicators.

Inflation is improving, although it remains well above the Fed’s 2.0% target range, and there are other indicators (like labor participation and unemployment) that have recovered some of the ground lost in 2020. But the weird part remains that this all seems quite civilized. To some, the Treasury curve spread continues to suggest a recession is looming, but in my neighborhood workers are still in short supply, restaurants are busy, and contractors are booked well into the future. Today’s ~3.36% 10-year Treasury rate is less than 100 basis points higher than the average since the start of the Fed interventionist era in 2008 and a whopping 257 basis points lower than the average since 1965. Think about how much capital has been raised in market environments much worse than now (including most of the modern-day healthcare inpatient infrastructure). Again, the main culprit in retarded capital formation is institutional credit management concerns rather than the funding environment.

The major fallout from the Fed’s recent anti-inflation efforts seems concentrated with financial intermediaries rather than consumers (or workers), and the financial intermediary stress the Fed is relying on to help curb economic activity is grounded in their own balance sheet management decisions rather than deteriorating loan portfolios. We’ve looked at this before, but it bears repeating that in the “great inflation” of the 1970s, the Chicago Fed’s Financial Conditions Index reached its highest recorded points (higher means tighter than average conditions) and in this most recent inflationary cycle, that same index has remained consistently accommodative. Can you wring inflation out of a system while retaining relatively accommodative financial conditions? Which begs the question of whether any Fed pause is more about shifting priorities: downgrading the inflation fight in favor of moderating the financial intermediary threat? We might be living a remake of the 1970s version of stubborn inflation, which means that all the attendant issues—rolling volatility across operations, financing, and investing—might be sticking around as well.

Meanwhile, somewhere out in the Atlantic the debt ceiling storm is forming. Who knows whether it will make landfall as a storm or a hurricane, but it does remind us that the operative portion of the Jamie Dimon quote noted above is this part of the crisis is over. The next part of the long saga that is about us climbing out of a deep fiscal and monetary hole will roll in and new variations of the same central challenge will emerge for healthcare leaders.

A Healthcare Makeover

Ken Kaufman has been advancing the idea that healthcare needs a “makeover” to align with post-COVID realities. Look for a piece from him on this soon, but the thesis is that reverting to a 2019 world isn’t going to happen, which means that restructuring is the only option. The most recent National Hospital Flash Report suggests improving margins, but they remain well below historical norms and the labor part of the expense equation is structurally higher. Where we are is not sustainable and waiting for a reversion is a rapidly decaying option.

My contribution to Ken’s argument is to reemphasize that balance sheet is the essential (only) bridge between here and a restructured sector and the journey is going to require very careful planning about how to size, position, and deploy liquidity, leverage, and investments. Of course, the central focus will be on how to reposition operations. But if organic cash generation remains anemic, the gap will be filled by either weakening the balance sheet (drawing down reserves, adding leverage, or adopting more aggressive asset allocation) or by partnering with organizations that have the necessary resources.

Organizations reach the point of greatest enterprise risk when the scale of operating challenges outstrips the scale of balance sheet resources. Missteps are manageable when the imbalance is the product of rapid growth but not when it is the result of deflating resources. If the core imperative is to remake operations, the co-equal imperative is continuously repositioning the balance sheet to carry you from here to whatever defines success.

CHS looking for more M&A, share price slumps

Franklin, Tenn.-based CHS, which reported a net loss of $20 million in the first quarter on revenues of $3.1 billion, is on the hunt for new acquisitions just as it is also in discussions to sell off more assets.

“We are considering further opportunities to expand our portfolio,” CEO Tim Hingtgen said in a webcast discussing first-quarter results.

Selling off certain assets would also help balance the system and further reduce some of its debt, President and CFO Kevin Hammons confirmed on the call.

“Moreover, we may give consideration to divesting certain additional hospitals and non-hospital businesses,” CHS said in an SEC filing. “Generally, these hospitals and non-hospital businesses are not in one of our strategically beneficial services areas, are less complementary to our business strategy and/or have lower operating margins. In addition, we continue to receive interest from potential acquirers for certain of our hospitals and non-hospital businesses.”

The health system, which operates 79 hospitals in 15 states, has agreed to sell four more hospitals effective Jan. 1, the filing stated.

CHS recently completed the $92 million sale of Oak Hill, W.Va.-base Plateau Medical Center to Charleston, W.Va.-based Vandalia Health. It also finalized on Jan. 3 an $85 million sale of its former 122-bed facility in Ronceverte, W.Va, also to Vandalia Health.

CHS shares were trading at $6.24 before its results were released. It is currently trading at approximately $3.70.

With bankruptcy looming, Bright Health is fully ditching its insurance business

Embattled insurtech Bright Health will fully ax its insurance business as a potential bankruptcy looms, the company announced Friday.

The company secured an extension to its credit facility through June 30, giving it a few extra months to avoid going belly-up. To ensure it qualifies for the extension, the company must find a buyer for its California-based Medicare Advantage (MA) business by the end of May, according to a filing with the Securities and Exchange Commission.

Bright Health revealed March 1 that it had overdrawn its credit and would need to secure $300 million by the end of April to stay afloat.

The MA business includes nearly 125,000 California seniors across its Brand New Day and Central Health Plan brands. In the announcement, Bright said the sale would “substantially bolster” its finances.

“Since our founding, Bright Health has worked to make healthcare simpler, more personal and affordable for consumers,” CEO Mike Mikan said in the announcement. “As our markets evolve, we are taking steps to adapt and ensure our businesses are best positioned for long-term success.”

In late 2022, the company announced that it would exit the Affordable Care Act’s (ACA’s) exchanges and slashed its reach in MA down to just California and Florida as its financial challenges mounted. It later cut the Florida plans as well.

Manny Kadre, lead independent director of Bright Health’s board of directors, said in the announcement that the company has “received inbound interest” about the California MA business as it explores its options.

With the full divestiture of its insurance business, that means Bright Health will be all-in on its NeueHealth care delivery services. Mikan said in the announcement that the segment performed well in the first quarter and has grown to serve about 375,000 value-based care customers.

As Bright shops for a buyer for its MA plans, it’s also continuing to unwind the ACA business, a process that hit a snag as it was hit with a lawsuit from Oklahoma-based health system SSM Health, which alleged that the insurer owed it more than $13 million in unpaid claims.

Bright Health is also under the gun to boost its stock price, as the New York Stock Exchange has threatened to delist its shares. Shares in the company were trading at 17 cents on Friday afternoon.


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

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

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

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

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

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

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

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

These are long-term challenges,

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

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

The current situation demonstrates why financial
reserves are so important:

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

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

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

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

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

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


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

Ÿ These headwinds will continue to challenge not-forprofit

hospitals and health systems well into 2023.

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

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


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

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

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

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

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

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

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

The Financial Structure of Not-for-Profit Hospitals and Health Systems

Not-for-profit hospitals and health systems rely on
three interdependent functions to contribute to the
financial resilience of the organization: namely, the
ability to withstand adverse changes to these core
functions and continue to provide services to the
community (Figure above).

Ÿ The Operating Function:

The Operating Function
manages the portfolio of clinical services and
strategic initiatives that define the charitable mission
of the organization
. Clinical services generate
patient revenue, and if that revenue creates a
positive margin (i.e., exceeds expenses), that excess
is invested back into the health system. Operating
margins are, on average, very low in not-for-profit
For example, for the not-for-profit
hospitals and health systems rated by Moody’s
Investors Service, median operating margins from
2017–2021 ranged between 2.1% and 2.9%
. These
rated organizations represent only a few hundred
of the thousands of hospitals and health systems
in the country and are among the most financially
healthy. A 2018 study of a wider group of more than
2,800 hospitals found an average clinical operating
margin of -2.7%.

Ÿ The Finance Function:

Because the positive margins
generated by the Operating Function are rarely
enough to support the intensive capital needs of
maintaining and improving acute-care facilities, care
delivery models, and technology, not-for-profit health
systems rely on the Finance Function for internal
and external capital formation. The Finance Function
builds cash reserves and secures external financing

(e.g., bond proceeds, bank lines of credit) to support
the capital spending needs of the organization.
cash reserves maintained by the Finance Function
also help the organization meet daily expenses at
times when expenses exceed revenues.

Ÿ The Investment Function:

Not-for-profit hospitals
and health systems will also endeavor to invest
some of their cash reserves to generate returns
that, first, act as an additional hedge against
potential risks that could disrupt operations or cash
flow, and second, pursue independent returns.

Any independent returns generated serve as an
important supplement to revenues generated
through the Operating Function.

The three functions described above are common to
all not-for-profit organizations.
The main differences
are mostly within the Operating Function. In higher
education, for example, tuition revenue takes the
place of clinical revenue. While higher education also
maintains enterprise risk, the Operating Function
for colleges and universities is less vulnerable to
volume swings as enrollment is typically steady and
predictable. Likewise, higher education is less labor
intensive than healthcare.

Financial reserves include all liquid cash resources
and unrestricted investments held in the Finance and
Investment Functions. These reserves are equivalent
to the emergency funds
individuals are encouraged
to maintain to help them meet living expenses for
six to twelve months in case of a job loss or other
disruption to income.

Absolute reserve levels are important, as discussed
above, but they must also be viewed relative to
a hospital’s daily operating expenses. A common

metric used to describe these reserves is Days Cash
on Hand.
If an organization has 250 Days Cash on
Hand, that means that it would be able to meet its
operating expenses for 250 days if revenue was
suddenly shut off. The size of Days Cash on Hand will
be proportionate to the size of the hospital and health
system. Some of the largest not-for-profit health
systems have annual operating expenses approaching
$30 billion annually: meeting those expenses for 250
days would require Days Cash on Hand of more than
$20 billion.

The shutdown that occurred in the early days of the
pandemic (March through May 2020) is an example
of a time when cash flow nearly shut off for most
hospitals (except for emergency care). Reserves,
measured in absolute and relative terms such as
Days Cash on Hand, allowed hospitals that were
nearly empty to maintain staffing and operations
throughout the period.
Other hospitals that were
inundated with patients during the initial surge
were able to fund increased staffing and personal
protective equipment costs through their reserves.
Other examples of how reserves provide a buffer

against unexpected events include natural disasters
such as hurricanes, tornadoes, deep freezes, and
wildfires, which can require the temporary shutdown
of operations; cyberattacks, which can halt a hospital’s
ability to provide services; a defunct payer that is unable
to reimburse hospitals for care already provided; or an
escalation in labor costs as experienced by many during 2022.

Without the reserves to pay for contract labor or
premium pay, many hospitals would have undoubtedly
had to close or limit services to their community.


Ÿ Financial reserves are created through the
interdependent relationship of operating, finance,
and investment functions in not-for-profit health

Ÿ These reserves build financial resilience: the ability
to withstand adverse changes to core functions and
continue to provide services to the community.

Ÿ Financial reserves play an important role in
supplementing any shortfalls
in revenue or capital
formation in one or more of these three functions.

Ÿ Financial reserves are equivalent to individual
emergency funds—both are intended to cover
expenses if income or revenue flows are
significantly disrupted.

Ÿ A common metric used to describe financial
reserves is Days Cash on Hand: an organization’s
combined liquid, unrestricted cash resources and
investments, measured by how many days these
reserves could cover operating expenses if cash
flows were suddenly shut off.

Financial reserves, measured in absolute
and relative terms such as Days Cash
on Hand, allowed hospitals that were
nearly empty during the early days of
the pandemic to maintain staffing and
operations throughout the period. Other
hospitals that were inundated with patients
during the initial surge were able to fund
increased staffing and personal protective
equipment costs through their reserves.

A Comparison: Financial Reserves and Higher Education Not-for-Profits

Not-for-profit hospitals and health systems are
not alone in their reliance on financial reserves;

most not-for-profit organizations carry reserves
that enable them to maintain operations and
make needed investments even in times of weaker
operating performance. Higher education is
probably most comparable to healthcare
, with
significant overlaps between the two sectors.
Moody’s Investors Service, one of the three major
rating agencies, notes that 16% of its rated higher
education institutions have affiliated academic
medical centers (AMCs), and revenue from patient
care at these AMCs contributes to 28% of the
overall revenues for the higher education sector.

The magnitude of Days Cash on Hand levels
varies by industry; financial reserves maintained
by private not-for-profit higher education

institutions, for example, are significantly greater
than those maintained by not-for-profit hospitals
and health systems.
For comprehensive private
universities across all rating categories, Moody’s
reports median Days Cash on Hand in 2021 of 498
days for assets that could be liquidated within a
year. This compares with a median 265 Days Cash
on Hand in 2021 across all freestanding hospitals,
single-state, and multi-state healthcare systems
rated by Moody’s.

Financial reserves are a critical measure of
financial health across both healthcare and higher
They help ensure that not-for-profit
colleges, universities, hospitals, and health systems
can continue to fulfill their vital societal functions
when operations are disrupted, or when they are
experiencing a period of sustained financial distress.

13 hospital and health systems hit with credit downgrades, revisions

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

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

Baptist Health Care (Pensacola, Fla.): 

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

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

Beacon Health (South Bend, Ind.): 

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

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

Kuakini Health System (Honolulu): 

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

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

Baystate Health (Springfield, Mass.): 

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

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

Penn State Health (Hershey, Pa.): 

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

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

Legacy Health (Portland, Ore.): 

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

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

Providence (Renton, Wash.): 

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

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

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

Thomas Jefferson (Philadelphia): 

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

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

Oaklawn Hospital (Marshall, Mich.): 

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

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

DCH Health (Tuscaloosa, Ala.): 

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

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

DCH Health operates a total of 510 staffed beds.

AU Health System (Augusta, Ga.): 

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

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

PeaceHealth (Vancouver, Wash.): 

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

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

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

Mercy Iowa City Hospital:

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