Nonprofit hospitals are watching the financial markets closely to monitor investment income and the potential impact of a sharp equity market correction on liquidity.
Fitch Ratings released a statement Oct. 23 noting a market correction would cause a decline in nonprofit hospital liquidity, but the firm believes the credit effects “would be limited” since hospitals it rates have substantial unrestricted liquidity.
“Large investment return declines would erode balance sheet strength and may compromise hospitals’ ability to address mounting challenges,” the report notes. “These include a tight healthcare labor market, potential reductions in ACA marketplace subsidies if Congress does not extend the enhanced credits, and the impact of higher tariffs as well as reduced federal Medicaid spending, tighter Medicaid eligibility and limits on state provider taxes beginning in 2026.”
Fitch said many hospitals within its network would be able to manage the correction without a ratings hit due to the strong liquidity relative to debt obligations. Most have balance sheets performing above pre-pandemic averages, the report noted. Growth over the last year for hospitals especially rated in the ‘A’ and ‘AA’ categories will be helpful.
“In 2024, investment income grew as a share of total revenue for investment-grade-rated hospitals, which tend to have larger portfolios with greater allocations to equities and alternative investments,” according to the report. “Hospitals rated below investment grade tend to have more conservative portfolios, which performed better in 2023 after a series of Fed rate hikes.”
Six notes on average performance for Fitch-rated hospitals last year:
- Investment income increased from 1.6% in 2023 to 2.3%
- Investment income jumped 28% as a share of EBITDA
- Investment returns added nearly 20 days to days cash on hand
- Investment returns added 15.5 percentage points to cash-to-debt last year
- Investment returns were more than 30% of EBITDA for large and highly rated systems
- Investment returns were 3% of revenue for large and highly rated systems
