Credit downgrades outpaced upgrades for nonprofit hospitals

 Credit downgrades outpaced upgrades for nonprofit hospitals


Photo: Emir Memedovski/Getty Images

Once again, more nonprofit hospitals experienced credit downgrades than upgrades in 2024, though the difference between the two is not as great as it has been in previous years, according to a new analysis.

In a blog post, Kaufman Hall Managing Director Lisa Goldstein reviewed the rating actions published by three credit agencies – Moody’s, S&P and Fitch – and said they collectively downgraded 95 facilities and upgraded 37 in 2024, compared to 116 and 33, respectively, in 2023.

Many of the downgrades occurred because expenses exceeded revenue growth, she said, despite the decline in use of contract labor and a recession of volumes back to pre-pandemic levels.

Most of the upgrades were due to lower-rated hospitals becoming merged into higher-rated systems, while many downgrades were due to outsized increases in debt to fund growth strategies.

WHAT’S THE IMPACT

According to Goldstein, the downgrades affected a variety of hospitals, from small independent providers to large regional systems. Common threads with downgraded hospitals included weaker financial performance, payer mix shifts away from commercial and more toward governmental, and thinner reserves.

Many of the downgrades were concentrated along the coasts, particularly affecting California and the Pacific Northwest, along with New York and Pennsylvania.

So-called “multi-notch” downgrades – in which the hospital was downgraded two or more levels – were common during the year, with one hospital, Jackson Hospital and Clinics in Alabama, being downgraded four notches and subsequently defaulting on an interest payment, said Goldstein. Multi-notch upgrades were primarily attributable to mergers into higher-rated systems.

While many upgrades followed mergers, others were upgraded because of improved financial performance, and stable or growing liquidity, said Goldstein. And some of the upgraded hospitals began receiving new supplemental funds known as Direct Payment Programs, which are subject to annual federal and state approval, which Goldstein said casts uncertainty on their long-term reliability.

Hospitals that saw upgrades were located across the U.S. and included academic medical centers, independent hospitals and regional health systems. 

As in past years, Goldstein said the majority of ratings actions in 2024 were affirmations, which should be welcome news to investors. S&P moved its industry outlook to Stable from Negative, and Fitch moved Deteriorating to Neutral, while Moody’s went from Negative to Stable.

THE LARGER TREND

Fitch said in December that while there are still headwinds, the not-for-profit hospital sector has seen improved operating margins following a tough three years of compression. In particular, the escalation of labor expenses has slowed somewhat, along with an ease in inflationary pressures.

Hospitals’ balance sheets have seen improving operating cash flows and strong equity market returns, Fitch said.

Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.



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