The broad balance sheet shows hospitals are improving financial strength and flexibility compared to two decades ago.
Not-for-profit hospitals and health systems are financially keeping up with changes in the healthcare landscape, according to a new S&P Global Ratings report.
S&P Global Ratings said it believes the not-for-profit healthcare sector has been incredibly resilient over the past two decades, in large part due to strong management and governance.
The broad balance sheet shows improved financial strength and flexibility compared to two decades ago, as is also the case for maximum annual debt service coverage.
Hospitals have done this throughout a time when changes in government policy, reimbursement and the move to value-based care have been factors in their operating performance and financial position. The report shows more variability in operating revenue and excess margins.
S&P Global looked at providers rated from BBB+ to AA. The stronger providers have seen margin improvement, while weaker rated providers have been generally stable with some pockets of weakness at the lowest reported rating levels, the report said.
WHY THIS MATTERS
Health system challenges include increasing levels of competition and disruption; consumerism and the heightened focus on quality measures and outcomes; the rapid growth in technology and big data analytics; the rise of population health and changes in payment delivery models; and a fundamental shift in how and where patients are treated.
“To be successful, provider management teams must adapt and adjust or run the risk of being left behind,” the credit analysts said.
A factor benefiting health systems has been the low interest rate environment. This has allowed hospitals to finance strategic capital assets, while keeping carrying costs at very manageable levels.
Industry consolidation has had a favorable impact on enterprise profiles, the report said. While ample “horizontal” competition exists for both hospitals and health systems, in many markets consolidation has made it more manageable.
But competition between hospitals and health systems and new market entrants seeking to control niche services or some aspect of ambulatory care services is presenting new and rapidly evolving threats to enterprise profiles, the report said.
Net patient service revenue has risen across all S&P rated categories for both stand-alone and system providers. This is due to a variety of reasons, including the addition of more business lines such as physician and insurance services, and increased industry consolidation;
Operating and excess margins are more complicated, highlighting the ebb and flow of industry trends, including increased joint venture and affiliation activity and investment market volatility.
Maximum annual debt service coverage has grown in all but the weakest rated levels, highlighting an improving balance between operational performance and debt.
Growth in days’ cash on hand has been a universal success even as capital expenditures remain robust.
Debt levels have been favorable with an improved cushion ratio and declining debt as a percentage of capitalization, both well-established trends.
Momentum continues to build for major legislative and regulatory changes at both the national and state level.
Many of the hospitals and health systems in S&P Global’s rated portfolio have navigated through numerous changes. Historically, a review of ratios over time demonstrates that providers have responded well to change as a group, although results have varied among individual organizations.
While credit quality can and will change over time, the majority of the rated portfolio is well-positioned to compete effectively as new strategies are required, the analysts said.
S&P Global Ratings analyzes and publishes not-for-profit healthcare median ratios annually, and has been doing so for over 20 years.
ON THE RECORD
“In our view, senior leadership and management teams have provided guidance and direction through a series of difficult and changing periods and have emerged as generally stronger organizations from a financial profile standpoint,” the credit analysts said. “We believe the vast majority of rated hospitals and health systems have the financial discipline and expertise to navigate the challenges over the next decade and beyond, and while there may be some movement in underlying trends in these key metrics, the overall financial outlook, barring any significant shocks from policy or macroeconomic shifts, should remain generally consistent.”