U.S. nonprofit hospitals and health systems saw broad stability in their operating performance, liquidity and leverage in 2015. However, the fiscal environment for the remainder for 2016 and beyond is expected to be more challenging for these nonprofits, according to a Fitch Ratings report.
"Fitch's rated nonprofit hospital sector has a stable rating outlook, with issuers demonstrating stability across all rating categories. However, we maintain a negative sector outlook reflecting our expectation that many of the expected pressures from healthcare reform have not been diminished, only deferred," Emily Wadhwani, director in Fitch's U.S. Public Finance group, said in a statement.
Operations and profitability improved for the second consecutive year in 2015 due to continued focus on improving operating cost efficiencies, expanded coverage from the Affordable Care Act, and greater focus on revenue cycle improvement and collections. According to Fitch, the median operating margin and operating EBITDA margin improved to 3.5 percent and 10.3 percent, respectively, in 2015 from 3 percent and 9.7 percent in the prior year.
Fitch expects operating performance and profitability to be more volatile in 2016, reflecting growth in the Medicare population, CMS' further implementation of value-based reimbursement models (for example, bundled payments) and Medicaid patients accessing more healthcare services.
Key median liquidity metrics were virtually unchanged from the prior year despite relatively volatile investment markets in the latter half of 2015 and early 2016, Fitch said. Fitch attributes the stable liquidity metrics to solid cash flow generation, moderate capital spending and healthcare's diversified investment approach. Fitch believes the continued focus on revenue cycle and extended lead time allowed for a smooth transition to ICD-10 with little disruption to collections and days in accounts receivable.
Overall median leverage ratios were unchanged to slightly improved continuing the longer term trend towards moderating leverage position, according to Fitch. Fitch said the moderation in median debt and leverage ratios reflects the lower capital demand, a favorable interest rate environment, and moderate revenue growth and improved profitability.
As far as rating actions during 2015, they displayed a distinctly positive trend, according to Fitch. From Jan. 1 through Dec. 31, 2015, the rating agency affirmed 146 ratings, downgraded nine ratings and upgraded 33 ratings. Of the downgraded credits, six ratings carried a negative rating outlook, two carried a stable rating outlook and one was on rating watch negative. Fitch said drivers on negative rating actions varied, but included weaker core operating performance due to declining utilization, the inability to curb expenditures or a material increase in debt. Reasons for upgrade were primarily driven by improved cash flow, growth in liquidity, lower debt and acquisition by a higher rated credit.
Fitch said rating actions in 2016 are decidedly more balanced compared to 2014 and 2015. Through July 31, there have been 82 rating affirmations, 12 rating downgrades and 12 rating upgrades.
More articles on healthcare finance:
Should providers become payers? 4 key considerations
Calif. denies Saint Agnes Medical Center's request to lower charity care minimum
AHA urges CMS to delay site-neutral payment policy