Operating margins for systems and hospitals continued to decline due to increasing expense pressures as well as slowing net patient revenue growth across all rating levels.
Not-for-profit health systems and stand-alone hospitals have maintained generally favorable bond ratings due in large part to strong balance sheets, despite the continual decline in operating margins and cash flows.
S&P Global Ratings released research this week on the financial status of not-for-profit health systems and stand-alone hospitals in 2017.
The sector remained consistent in several year-to-year, such as improving days' cash-on-hand levels and marginal reduction in debt levels, though the study found that the underlying pressures on not-for-profits are beginning to take their toll. The operating margin for the sector declined from 2.4% in 2016 to 1.8% in 2017.
S&P also noted that not-for-profit health systems continue to outnumber stand-alone hospitals and received stronger overall ratings from the agency.
Ratings actions for the sector through June 22:
- 152 total affirmations
- 16 total upgrades, though six upgrades were driven by systems merging together.
- 15 total downgrades
S&P said a major factor that allowed health systems and hospitals to weather financial challenges last year was the combination of strong balance sheets and leadership.
Credit strengths of not-for-profit systems:
- Robust M&A activity has improved the financial profile for systems.
- Despite the same challenges with maintaining an overall patient base, systems have experienced a growth in outpatient services.
- Sizable investments in information technology have resulted in strong credit ratings.
S&P analysts said that stand-alone hospitals featured stronger medians than systems but found they are weakening. This is due to softer patient volumes, a weakening payor mix combined with increased pressure from commercial payors, and labor expenses.
How stand-alone hospitals performed:
- While the amount of stand-alone hospitals are shrinking, they produced stable balance sheets that were noted as a "principal strength of financial profile."
- Debt levels fell due to declining unrestricted net assets.
- However, negative operating margins appeared in BBB rating levels.
Jack O'Brien is the finance editor at HealthLeaders, a Simplify Compliance brand.
Strong balance sheets and capable leadership continue to lead the way for stable success.
M&A activity has bolstered the financial standing and credit ratings of not-for-profit health systems.
Not-for-profit systems are outnumbering stand-alone hospitals through increased M&A activity.
Stand-alone hospitals experienced their second consecutive year of negative outlooks.