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Default risk for US hospitals falls from 2020 peak despite lingering challenges

Default odds for U.S. hospitals and other segments of the healthcare industry have fallen since their 2020 peaks during the early days of the coronavirus pandemic, though questions around labor costs and cash flow continue to challenge healthcare facilities.

After jumping to 8.1% in 2020, the S&P Global Market Intelligence median market signals one-year probability of default score for healthcare facilities fell to 0.9% as of March 8. The figures represent the median odds that a company will default on its debt within the next year based on fluctuations in the company's share price and other country and industry-related risks.

Median probability scores fell across a broad selection of U.S. healthcare segments in March, following a spike during the early days of the pandemic in 2020. For example, the median odds pharmaceuticals companies could default in a year peaked at 7.7% in 2020 before dropping to 1.6% as of March 8.

While the biggest hospitals have ample funds to sustain their operations, most U.S. hospitals operate on thin profit margins in an environment beset with uncertainty by high-stakes policy debates, said Samuel Maizel, a partner in law firm Dentons' restructuring, insolvency and bankruptcy group. Many hospitals are seeing less cash flow due to lockdown measures on their operations and people shying away from emergency rooms, but a tidal wave of hospital bankruptcies is unlikely thanks in part to government stimulus funds, Maizel said.

"They're sitting on a lot of cash, which gives them a cushion even though they're continuing to lose money," Maizel said in an interview.

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U.S. not-for-profit short-term care hospitals have proven fairly resilient during the pandemic as federal aid and stronger balance sheets have helped them deal with pandemic challenges, Suzie Desai, a senior director at S&P Global Ratings, said in an interview. The Coronavirus Aid, Relief and Economic Security Act set aside $100 billion for providers. The $1.9 trillion American Rescue Plan Act of 2021, which the Senate approved on March 6, includes $8.5 billion to reimburse rural healthcare providers for lost revenue and additional expenses due to COVID-19.

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"That's why there haven't been those defaults because there has been some funds available," Desai said. "You still have some reserves."

But it is unclear how things will shake out for hospitals as stimulus funds dry up and longstanding challenges around things like labor remain, Desai said.

"One of the things we're watching is what do the expenses look like for labor, is it going to cost more to recruit?" Desai said.

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During a fourth-quarter 2020 earnings call on Feb. 2, HCA Healthcare Inc. CEO Samuel Hazen noted that the pandemic put pressure on nursing and that the for-profit hospital company experienced some turbulence in its flexible staffing categories as nurses were taking travel positions or special pay positions.

Similarly, Universal Health Services Inc. CFO Steve Filton noted during the company's earnings call that labor costs for the for-profit healthcare company have increased due to overtime pay and payment for temporary or traveling nurses. Filton also noted during the Feb. 26 call that illness with the virus and clinician burnout has put pressure on their staffing numbers, though he said this should ease throughout the year.

"We don't have nearly as many nurses out. Many of our nurses and other employees are being vaccinated in real-time, so that should be helpful. The level of burnout should ease. The ability of nurses to chase premium dollars elsewhere will diminish. All those things should get better as COVID volumes decline, and that's why we believe that the current labor pressure is somewhat transitory," Filton said.

The odds of a default within a year for HCA Healthcare were near 0% as of March 8, after dropping from a 2020 high of 5.7%. The chances of default within a year for Universal Health Services were also near 0% as of March 8, an improvement from its 2020 high of 5.2%. An HCA Healthcare spokesperson declined to comment and referred questions to the company's recent earnings call. Universal Health did not respond to a request for comment.

A February report from management consulting agency Kaufman Hall found that in January 2021, adjusted discharges — a way of measuring hospital profitability — dropped 17.6% compared to a year earlier, and emergency department volumes dropped 24.7% year over year.

Dallas-based Tenet Healthcare Corp. anticipates adjusted hospital admissions will recover to 85% to 90% of 2019's actual hospital admissions in 2021 despite the hits its patient volumes took early on. Inpatient and outpatient admissions volumes have a substantial impact on hospitals' revenues and margins. Tenet Healthcare's odds of defaulting in a year were near 0% as of March 8, an improvement from its 2020 high of 19%. Tenet has refinanced at favorable rates some long-term debt and retired debt, company spokesperson Lesley Bogdanow said in an email.

"We closely managed our costs, including capital, and adjusted to the downturn matching our cost curve to demand and rebuilding as demand returned," Bogdanow said.

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Government aid helped fortify revenue for hospitals, many of which also tapped credit lines and took advantage of low-interest rates to help navigate the pandemic, David Peknay, a director at S&P Global Corporate Ratings, said in an interview. The COVID-19 pandemic pushed down patient volumes to hospitals and it remains unclear if and when those levels will return, Peknay said.

Quorum Health Corp., a for-profit hospital operator, entered chapter 11 bankruptcy and defaulted in 2020, but the issues pressuring the company — poor performing facilities and a challenging debt maturity schedule — were not related to the pandemic, Peknay said. Quorum eventually shed about $500 million worth of debt as part of its completed restructuring. Quorum did not respond to a request for comment.

Quorum's bankruptcy was one of 13 filed in 2020 by U.S. companies that own and operate healthcare facilities including places like hospitals and nursing homes, according to Market Intelligence data.

In Canada, government support for the public healthcare system has played an important role in helping hospitals manage expenses during the pandemic, Travis Shaw, a senior vice president of public finance at DBRS Morningstar, said in an interview.

"The provincial governments are only standing behind their hospitals," Shaw said. "This pandemic has only strengthened the relationship and the importance of having financially sound acute care hospitals."