Positive rating outlooks rose by three in Q3, while negative rating outlooks stayed constant as Fitch Ratings fully implemented new review guidelines for nonprofit hospitals and health systems.
Nonprofit hospitals and health systems performed consistently in Q3 despite new criteria utilized to more accurately determine relative credit score, according to a new report from Fitch Ratings.
Overall, the nonprofit hospitals sector upgraded 11 security ratings and downgraded 11 in Q3, while positive rating outlooks increased to 20 and negative rating outlooks decreased to 15.
Upgraded ratings were top-heavy, hovering in the A+ to AA range, while downgraded systems concentrated between BBB- and A-.
This marks Fitch's first ratings release for nonprofit hospitals since revising its healthcare review criteria, which were implemented in early July. According to Fitch, the new criteria are in place to emphasize "the analytical areas that are most critical" to assessing credit quality among nonprofit systems.
4 key ratings drivers:
- Revenue defensability, which assesses an organization's exposure to "demand volatility" and ability to sustain profitability while addressing cost pressures.
- Operating risk, analyzes a nonprofit's ability to adequately manage growth over time and how the organization is prepared to handle volatility of costs.
- Financial profile, evaluates the nonprofit's liquidity profile and overall leverage in a historical context as well as on a forward-looking basis.
- Asymmetric additive risk factors, which include: debt structure, management and governance, and outstanding issues that "may impact the organization's ability to repay debt."
- Fitch added that it only accounts for weaker characteristics in asymmetric additive risk factors when it determinds the impact of a final rating.
The new criteria impact revenue bonds for tax-supported hospital districts along with children's and specialty hospitals, but does not affect the broader nonprofit sector.
Q3 2018 was a return to relative predictability among non-profit hospitals and systems, as there were 23 ratings upgrades in Q2 while downgrades remained constant at 11.
Despite Fitch raising positive outlooks and lowering negative outlooks, non-profits face several challenging factors going into 2019.
Key credit issues facing nonprofits:
- Fitch identified a negative sector outlook and stable rating outlook for 2018.
- The ratings agency also highlighted sustained pressure on margins and operating income levels.
- Nonprofit hospitals and health systems remain vulnerable to "uncertainty" surrounding the political landscape and disrupters entering the industry.
- While there have been strong balance sheets, nonprofits have experienced widespread consolidation and a widening credit gap which has hurt their prospects.
Fitch's Q3 study comes a few months after the ratings agency reported that nonprofit health system operating margins declined for the second year in a row despite producing otherwise strong balance sheets.
Related: Nonprofit Operating Margins Struggle Despite Strong Balance Sheets
The ratings agency attributed the decline to rising costs in several areas, including prescription drugs and labor wages, as well as the transition to offering value-based care options.
Jack O'Brien is the Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.
KEY TAKEAWAYS
In Q3, there were 11 rating upgrades and 11 downgrades, which was in line with historical norms after upgrades rose significantly in Q2.
Negative rating outlooks decreased to 15 while positive rating outlooks increased to 20, up three from Q2, when the new rating criteria for non-profit hospitals were instituted.
According to Fitch Ratings, the new criteria are in place to emphasize "the analytical areas that are most critical" to assessing credit quality among non-profit systems.