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Analysis

COVID-19 Impact: S&P Revises Outlook for Nonprofit Acute Care Sector to Negative

By Jack O'Brien  
   March 26, 2020

The decision came less than a week after Moody's and Fitch both changed their outlooks for the healthcare sector.

S&P Global Ratings revised the outlook for the nonprofit acute care sector from stable to negative Wednesday due to the "possible prolonged" impact associated with the ongoing spread of coronavirus disease 2019 (COVID-19).

The ratings agency cited concern around "significant uncertainty" created by the pandemic as a primary driver for revising the outlook to negative for 2020.

S&P also noted that provider organizations faced challenges related to revenue generation and expense control prior to the coronavirus crisis, which will only be amplified going forward.

"For all healthcare organizations, we believe the pandemic will result in sizeable increases in operating costs, particularly for labor and supplies, reduced volume and revenues related to elective and non-essential healthcare needs, reliance on working capital lines of credit, and material declines in unrestricted reserves and non-operating revenue as the investment markets weaken," the S&P report stated.

The ratings agency added that while many providers could "manage through" the pandemic if is contained during Q2 2020, certain hospitals will not be able to maintain their current ratings or outlooks.

Financial vulnerabilities for hospitals include unrestricted reserves and liquidity, reliance on non-operating revenues for debt service coverage, and "high contingent liabilities including strict covenants that may be breeched," according to S&P.

Nonprofit health systems and standalone hospital profitability will also be negatively impacted by the spread of the coronavirus, according to the report, though this will largely depend on the "duration, severity, and location of outbreaks." 

The report noted that providers will face higher labor and supply expenses related to the crisis, and though there will be some inpatient revenue generated from treating COVID-19 patients, it will not offset the revenue generation lost to the cancellation of elective surgeries. 

S&P's decision to revise the nonprofit acute care outlook came less than a week after Moody's Investors Service and Fitch Ratings both changed their outlooks for the healthcare sector.

Moody's expects the sector to see lower cash flow in 2020 compared to 2019 and revenue declines associated with the cancellation of elective surgeries. 

The ratings agency expects "some containment" of the virus during the second half of 2020 but cited concerns with nonprofit healthcare companies facing rising expenses and widespread uncertainty.

Meanwhile, Fitch projects increased claims costs associated with the spread of the virus, which will diminish profitability and debt service metrics.

On the highest end of Fitch's ratings forecast, the COVID-19 outbreak might eliminate earnings for the payer industry for 2020.

Jack O'Brien is the finance editor at HealthLeaders, a Simplify Compliance brand.


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