Nonprofit hospitals’ financial health is increasingly vulnerable to market volatility, with liquidity emerging as a critical differentiator in navigating today’s macroeconomic pressures, according to a recent report from Fitch Ratings.
Five takeaways for CFOs:
1. Liquidity is a critical buffer in a challenging operating environment
– Nonprofit hospitals with strong liquidity and investment income are best positioned to manage rising labor and supply chain costs, as well as policy risks such as Medicaid changes and tariffs.
– Robust balance sheets are crucial in protecting against unexpected shocks that could compress operating margins and affect reimbursement.
2. Investment income has propped up financial resilience
– Median investment returns of 9.8% among nonprofit hospitals in the first half of 2024 added 20 days to the median 220 days cash on hand and 17 percentage points to median cash-to-adjusted debt (now at 179%).
– From 2020 to 2023, investment returns added 28 DCOH days and 18 percentage points to cash-to-adjusted debt metrics, according to Fitch. Without these returns, liquidity would have eroded more sharply, placing pressure on credit ratings.
3. Equity and fixed income strategies are driving outcomes
– The S&P 500’s strong performance (14% annualized return from 2020-2024) and the Federal Reserve’s interest rate hikes helped hospitals with more conservative, short-duration fixed-income portfolios generate favorable earnings, according to Fitch. These gains were especially helpful for lower-rated hospitals, boosting overall sector resilience.
4. Tariffs and inflation may pressure margins
– New tariffs could drive up equipment and pharmaceutical costs, while contractual limits with payors may restrict hospitals’ ability to pass those costs on.
– If investment income softens and costs rise, Fitch warns of potential declines in DCOH and increased financial strain in 2025.
5. Credit ratings may diverge based on liquidity and asset allocation
– Fitch stress-tests each hospital’s investment portfolio based on its unique asset mix, with liquidity and leverage metrics serving as key inputs in credit ratings. Any deterioration in these areas could lead to rating pressure — especially for hospitals with weaker reserves — while nonprofit hospitals with strong cash positions tend to be more credit-resilient than their for-profit counterparts.
