Fitch provides update on new rating criteria for nonprofit hospitals

On Jan. 9, Fitch Ratings finalized rating criteria changes for U.S. nonprofit hospital and health system revenue debt.

The criteria changes, which also apply to tax-supported hospital districts, include introduction of revenue defensibility, operating risk and financial profile rating factors as well as individual assessments for each of those factors.

They are designed to provide a more analytical view of the organization's operating cost flexibility, as well as the organization's ability to handle cost pressures, according to Fitch. This means the criteria is more focused on comparable ratios that more clearly highlight differences among credits for organizations, regardless of size and scope.

Kevin Holloran, senior director and head of Fitch's U.S. nonprofit healthcare group, says he is pleased with the results of the criteria changes thus far.

The agency initially predicted about 15 percent of its roughly 300 ratings would be affected over time by the new criteria. Mr. Holloran still anticipates this will be the case. But for now, the agency is focusing on 34 credits that are on ratings watch and at risk of changing either negatively or positively due to the new criteria.

"I think the 15 percent is correct, but right now we're touching [on] the most volatile credits," says Mr. Holloran. "We're expecting to see more rating volatility the first half of the year [and that] trickles to a small number and averages to 15 percent" over time.

While Mr. Holloran is pleased with the new criteria overall, he acknowledged there are parts that are still misunderstood. He says one of the most misunderstood parts of the criteria changes is the base case and rating case, which offers a scenario of the organization's future performance using the Fitch Analytical Sensitivity Tool. FAST measures the sensitivity of the rated organization in various hypothetical stress scenarios.

Mr. Holloran says the other two most misunderstood parts of the new criteria are defined benefit pensions and the role they play in revenue debt and revenue defensibility, which according to Fitch examines "how easily revenues can be increased to support debt services." 

"Pension liabilities below an 80 percent funding level are included in adjusted debt figures because they are liabilities — or a promise to pay — of the organization," he says.  "Similarly … revenue defensibility, while expected to be 'midrange' for most organizations, does not limit the overall rating, merely recognizes the fact that providers are largely price-takers due to high levels of government payers." 

Fitch plans to provide an official three-month update on the new criteria later in April.

 

 

 

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