articles Ratings /ratings/en/research/articles/190513-effective-management-continues-to-enable-not-for-profit-health-care-to-adapt-10966289 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List
COMMENTS

Effective Management Continues To Enable Not-For-Profit Health Care To Adapt

COMMENTS

S&P Global Ratings Definitions

COMMENTS

This Time Is Different: An Anemic And Uncertain Passenger Recovery Will Challenge U.S. Airports' Credit Quality

NEWS

U.S. Airport Ratings Placed On CreditWatch Negative On Severe Passenger Declines And Weakening Credit Metrics

COMMENTS

State Brief: North Dakota


Effective Management Continues To Enable Not-For-Profit Health Care To Adapt

The health care landscape in the U.S. has evolved significantly over the past two decades. And although it sometimes feels slow—especially in value-based care and reimbursement--the pace of change is accelerating. Momentum continues to build.

While major legislative and regulatory changes at both the national and state level can drive health care policy quickly and substantively, there are hosts of additional factors contributing to the fundamental changes in the health care delivery system. Hospitals and health systems have had to navigate through increasing levels of competition and disruption; consumerism and the heightened focus on quality measures and outcomes; the rapid growth in technology and big data analytics, the rise of population health and changes in payment delivery models and a fundamental shift in how and where patients are treated. All of these issues and many more are increasingly interwoven into the fabric of today's health care delivery system. To be successful, provider management teams must adapt and adjust or run the risk of being left behind.

S&P Global Ratings believes the not-for-profit health care sector has been incredibly resilient, in large part due to strong management and governance, as over the past 20 years transformation has taken place at an increasing pace, encouraging our belief that even more change is coming. Many of the hospitals and health systems in our rated portfolio have had to manage this evolution, and while credit quality can and will change over time, we believe the majority of our rated portfolio is well-positioned to compete effectively as new strategies are required.

Historically, a review of ratios over time demonstrates that providers have responded well to change as a group, although results have varied among individual organizations. We have written extensively on the key issues that have influenced not-for-profit health care. In particular, "Shifting Competition Leads U.S. Not-For-Profit Health Care Organizations To Accelerate New (And Old) Strategies," published May 14, 2018, on RatingsDirect, which speaks to the broad changes in the sector and how health care organizations are adapting.

As we think about the underlying factors that have influenced providers the past two decades, it is also important to understand how that has translated into operating performance and financial position. While organizational strategies, and how management and governance respond to evolving, and at times adverse business conditions, are equally important to long term viability, so too is how those strategies affect the overall financial profile of a health care organization. S&P Global Ratings analyzes and publishes not-for-profit health care median ratios annually, and has been doing so for over 20 years. We decided to look back at some key financial metrics since the turn of the century and evaluate how hospitals and health systems have fared during a period of transition and constant change.

Median Ratio Trends Over Time

At a high level, broad balance sheet measures indicate improving financial strength and flexibility compared to levels two decades ago, as is also the case for maximum annual debt service coverage. There is clearly more variability in operating and excess margin measures as governmental policies change, myriad operating headwinds persist, and the investment markets wax and wane, but stronger providers have seen margin improvement, while weaker rated providers have been generally stable with some pockets of weakness at the lowest reported rating levels. Furthermore, the long period of operating in a low interest rate environment has certainly benefited most providers, as they have been able to finance strategic capital assets, while keeping carrying costs at very manageable levels.

The ratios highlight a number of interesting trends:

  • Across most of the key metrics there is greater definition between rating medians. Where key ratios were once clustered together more tightly, they are now more dispersed, highlighting greater definition between each of the rating levels;
  • Net patient service revenue has risen across all ratings for both stand-alone and system providers for a variety of reasons, including addition of many more business lines (among them physician and insurance services) and more recently, increasing industry consolidation;
  • Operating and excess margins are more complicated, highlighting the ebb and flow of industry trends since the turn of the century, including increasing joint venture and affiliation activity and investment market volatility;
  • Maximum annual debt service coverage has grown in all but the weakest rating levels, highlighting an improving balance between operational performance and debt;
  • Growth in days' cash on hand has been a universal success story even as capital expenditures remain robust; and
  • Debt levels have been favorable with an improved cushion ratio and declining debt as a percentage of capitalization, both well-established trends.

In general, these ratios highlight a favorable picture of management and governance in not-for-profit health care providers. In our view, senior leadership and management teams have provided guidance and direction through a series of difficult and changing periods and have emerged as generally stronger organizations from a financial profile standpoint. We believe the vast majority of rated hospitals and health systems have the financial discipline and expertise to navigate the challenges over the next decade and beyond, and while there may be some movement in underlying trends in these key metrics, the overall financial outlook, barring any significant shocks from policy or macroeconomic shifts, should remain generally consistent.

Despite not being captured as part of the medians, our view is that industry consolidation has had a favorable impact on enterprise profiles as well. While ample "horizontal" competition exists for both hospitals and health systems, in many markets consolidation has made it more manageable. Nonetheless, competition between hospitals and health systems among themselves and new market entrants seeking to control niche services or some aspect of ambulatory care services, is presenting new and rapidly evolving threats to enterprise profiles.

Key Sector Medians

In the following charts, for systems we have excluded 'BBB' and BBB-' providers as there are too few to provide meaningful analysis. We have also excluded speculative grade for both stand-alone and health systems, as those ratios cover such a wide range of providers ('CC' to 'BB+') that there is high variability and thus the trend is less meaningful.

Chart 1

image

Chart 2

image

Chart 3

image

Chart 4

image

Chart 5

image

Chart 6

image

Chart 7

image

Chart 8

image

Chart 9

image

Chart 10

image

Chart 11

image

Chart 12

image

Chart 13

image

Chart 14

image

Health Care Evolution Quickens Its Pace

As we look ahead, there are certainly takeaways from the past that can help inform our outlook, but for us there is always the question: do we let the past be our guide, or is the sector shifting in new ways? In many ways the answer to the latter is yes. The industry continues to evolve, as a raft of new competitors have brought very different approaches to problems. Some trends appear unstoppable, such as the ongoing decline in inpatient use rates despite an aging population. While this and the evolution of care management has ushered in a great many ambulatory care business lines and strategies, the movement of the overall business to one more closely aligned with the provision of ambulatory care, rather than inpatient care – however important – has presented an array of new issues for existing management teams to tackle.

The most important of these is the emergence of innovative business models and competitors. One very significant aspect of the current environment is that the new entrants generally are avoiding the inpatient business, and are more than happy to let hospitals and health systems operate in that space. These new entrants are instead trying to carve out niches where more nimble, but narrow, expertise can add value via both business tactics and quality of care improvements. In other cases, new entrants are trying to win the hearts and business of patients directly through physician-focused strategies that seek to control costs through commoditization of inpatient business. While there may have been variations of this type of strategy in years past (think ancillary businesses, ambulatory surgery centers, etc.), the new entrants today seem more focused, well capitalized, and are able to leverage technology and data analytics in a way that was not necessarily available a decade or more ago.

The importance of management

In our view, management teams have historically been up to the challenges facing the sector, often by incorporating competitor strategies or entering into joint ventures, while also dealing with shifting governmental policies. For example, most health care providers now have emerging access strategies that include storefronts or urgent care centers, or pharmacy access points. We have noted a great many new joint ventures and partnerships have been consummated to accomplish a wide range of goals, including the importation of new expertise within the provider organizations. As strategies evolve, so do the sets of skills needed to lead key departments, service lines, and strategic initiatives in order to ensure providers have the tools necessary to not only adapt, but thrive.

New technologies will be transformative

One of the important trends that is just emerging is the broad concept of augmented intelligence, which can include machine learning, robotic process automation, and other concepts. To date these efforts have been quite small and have not had any discernable impact on performance. However, it is very high on the list of "ready to emerge" technologies, and when coupled with the vast amounts of data being captured through new and sophisticated information technology platforms, advanced technologies have the potential to be transformative in clinical and non-clinical areas. Initially we expect advanced technologies to have the most material impact from a financial perspective in areas outside of direct patient care. For instance, we are seeing meaningful savings in areas including revenue cycle where rules-based processes can be automated with technology often leading to faster processing in a less costly and more accurate fashion. Over time, many systems are reporting numerous ways that augmented intelligence could assist physicians in broad efforts to improve quality, eliminate unnecessary treatments, and contribute to better cost management over time. We certainly believe advanced technologies will be arriving and making real contributions to performance over the next decade as systems continue to invest in these capabilities internally or through private investment in start-up companies.

Fee-for-service still predominates over value-based care

Separately, the movement to value and the slow pace of that movement has been a fixture of the sector for many years. While a number of providers in select markets have "moved up the value chain," the majority of providers have only dabbled in value business lines but remain very much fee-for-service oriented. While strong and ongoing efforts at controlling expenses have occurred in a great many provider organizations, the underlying cost and at times limited availability of care remain major issues in American life, although access seems to be greater today that at any time over the past 20 years. These and other pressing issues are the catalyst for various solutions debated across the country, including one significant concept - "Medicare for All." The current rise of the Medicare for All movement is best read, in our view, as a grassroots call for addressing the set of affordability, quality, and distribution issues that remain real impediments to access for millions of Americans and at times a hidden tax on all. As insurance availability, which grew meaningfully under the Affordable Care Act, has incrementally declined under the policies of the current administration, and given the legal and legislative threats to the system we have, the imbalances in the current system warrant serious attention. We believe health care remains a critical concern and "Medicare for All" is but one among many potential responses to the complicated issues surrounding the health care sector. However, it is hard to envision a scenario in which any significant piece of health care legislation becomes law, at least in the near term, given the political division at the federal level of government and apparent lack of willingness for real compromise. Nonetheless, we think it is likely that health care will once again dominate the political debate leading up to the 2020 presidential election.

Health care organizations will continue developing population health strategies, expand access points and treat patients closer to home, or in some cases, from home. We are seeing this already play out with the growth of large ambulatory networks, increased physician presence through large primary care networks, and the advent of tele-medicine and other technology-based platforms. One of the benefits from the years of investments made in information technology is access to expansive amounts of clinical data. The new focus point will be harnessing the data into actionable clinical and process improvements. Organizations will be better prepared to address population health strategies, as well as better understand the social determinants to healthy living, and act accordingly to promote wellness. While we recognize that challenges in the health care sector will be the one constant that does not change, we believe the ongoing robust policy debate, innovative ideas and technological advances, and even new entrants and competitors, are just a few of the contributing factors that will help shape the future delivery system.

Providers Will Continue To Chart Their Own Course

Looking beyond one to two years in health care is a difficult task, let alone predicting 10 or 20 years out. We believe the sector is in a transformative period, and the next two decades are sure to include innovations and further technological advances, changes in treatment patterns, and variations in payment models with goals of greater efficiency, transparency, and care coordination. The health care political debate will continue, as will challenges in court to the Affordable Care Act. However, while public policy will always play a major role in the future of health care, and can create an environment that contributes to meaningful change, we believe hospitals and health systems are charting their own course and will adjust to whatever legislative or other changes come their way.

This report does not constitute a rating action.

Primary Credit Analysts:Stephen Infranco, New York (1) 212-438-2025;
stephen.infranco@spglobal.com
Martin D Arrick, San Francisco (1) 415-371-5078;
martin.arrick@spglobal.com
Secondary Contact:Kenneth T Gacka, San Francisco (1) 415-371-5036;
kenneth.gacka@spglobal.com
Research Contributor:Prashant Singh, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.


Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back