Fitch: Minor headwinds coming for US children's hospitals

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U.S. nonprofit children's hospitals soon will feel the operational headwinds that are affecting the overall general acute healthcare industry, according to a new report by Fitch Ratings.

While the median "AA-" rating for stand-alone children's hospitals remains relatively strong because of their philanthropic draw, stable operating margins and specialized clinical service offerings, the median operating margin for these specialized facilities fell both in 2016 and 2017.

The median operating margin for children's hospitals declined sharply to 4.5 percent in fiscal year 2017 from 6.1 percent the year prior. Further, median operating earnings before interest, tax, depreciation and amortization fell as well, to 11.9 percent in fiscal year 2017 from 12.6 percent in fiscal year 2016.

Children's hospitals may be vulnerable to the same volume erosion many general acute care hospitals are facing, especially as payers push value-based contracts, and patients become more price-sensitive.

"The more aggressive push for risk-based contracts that have developed in several major metro areas could pose additional reimbursement pressure for those children's hospitals not yet structured to manage risk," explained Kevin Holloran, senior director at Fitch Ratings.

In addition, children's hospitals often are highly exposed to Medicaid as a payer, so governmental funding cuts will always remain a credit concern. 

Despite these minor operational stresses, the sector will continue to be insulated by governmental policies that strongly support pediatric services as well as healthy philanthropic support.

Read the full report here.

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