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 Content Team Lead and Finance Editor at HealthLeaders, an HCPro brand.
KEY TAKEAWAYS
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.