Stand-alone children's hospitals rated by S&P Global Ratings continue to exhibit healthy credit characteristics. This has led to favorable rating distributions, including an increasing number of rated children's hospitals within the 'AA' rating category over the last several years, with overall excellent financial median ratios reflecting stable and strong credit fundamentals. We rate 20 children's hospitals; 86% of them are rated 'A+' or higher, including one rated 'AA+', which is currently the highest rating that a U.S. not-for-profit acute health care provider has (see chart 1). Since our last published median report, two children's hospitals moved up to the 'AA' category from the 'A' category, and none moved to a lower rating. We added one new hospital, East Tennessee Children's Hospital (A/Stable), to our portfolio in the past year. Children's hospitals have remained stable historically: 19 of the 20 carried a stable outlook at Aug. 15, 2019; one had a positive outlook (see chart 2). Because of the small sample size, we do not calculate financial medians on the individual rating level and have excluded the single 'BBB+' provider as well.
The healthy rating distribution is a result of children's hospitals' very favorable enterprise profiles, which have contributed to ongoing financial strength and stability. The majority of the pediatric hospitals we rate are the only children's hospital provider or one of the few pediatric providers of key tertiary and quaternary services for a large population or geographic area, and often support robust research and medical education enterprises. Some have national recognition, while others have more of a regional presence and reputation. Among the latter, we have seen a few children's hospitals increase their investments in research to enhance their national presence. Many of the children's hospitals we rate see limited local competition for key services which provides further support for overall business strength and stability. That said, in some of the larger markets there is increasing focus by patients, employers, and insurers on relative costs including pediatric services, which are often higher at children's hospitals given their larger academic and research footprint. In these markets, there is increasing competition for certain secondary and even tertiary levels of pediatric care based on price with general acute care providers who have invested in this area to round out their service offerings and for those who may be part of narrower payor contracts. In many cases, the children's hospital physicians provide medical staff coverage to local acute care hospital providers, maintaining a steady source of referrals and dominance in the provision of tertiary and quaternary pediatric services. Ongoing investment in partnerships with general acute care providers both in and outside the immediate service area, including international markets, and in the general ambulatory network further support many children's hospitals' leading and growing market positions.
We continue to view children's hospitals' high exposure to Medicaid as a significant credit risk. Federal funding of state Medicaid programs remains essential, especially in Affordable Care Act expansion states. While curtailing Medicaid spending or converting Medicaid to a block grant structure did not occur over the past few years, we view the potential for program changes and cuts as ongoing credit risks. In addition, many children's hospitals (like many in the overall health care sector) have become more dependent on disproportionate share programs and supplemental fee programs, which involve matching funds from the federal government. While we monitor special fee programs and believe there are minimal short-term challenges, changes to these programs that lower federal matching funding could cause challenges over the medium and long term for children's hospitals and the sector as a whole.
Management of our rated children's hospital providers have discussed some of the same operating pressures that we have heard from our rated general acute care providers in recent years including expense pressures related to pharmaceuticals, supplies, and wages. In addition, revenues continue to be pressured around denials related to billing, particularly as it relates to Medicaid managed care (as more states have shifted away from fee-for-service), and to a lesser extent still, payer rate increases as employers and insurers still mainly focus on larger systems and general acute care providers. In terms of rates, as mentioned above, recent discussions with management have begun to highlight increased focus by employers for pediatric hospitals to reduce their overall costs. We also note that the need to invest in access and growth as well as expand research and technology has also affected operating margins and capital spending as these investments require robust cash flow to keep up with demand and maintain financial strength. Capital spending for children's hospitals is consistently higher than similarly rated stand-alone hospitals as they continue to invest in large-scale projects to accommodate growth and research initiatives. To that end, as the ongoing consolidation of pediatric services continues at children's hospitals, we expect that there will continue to be a need to spend capital on inpatient capacity and ambulatory growth, possibly at a faster and higher level than our general acute care providers.
Nonetheless, children's hospitals' solid business position along with sophisticated and high functioning management teams and governing boards, have led to operating and excess margins that have remained generally stronger than comparably rated stand-alone hospitals despite the high Medicaid payor mix and operating pressures typical of the industry. In addition, healthy balance sheets also resulted in related ratios generally exceeding medians for stand-alone providers and tend to benefit from good operating cash flow, significant investment income off healthy reserves and generally very favorable fundraising track records.
While our much smaller sample size of rated children's hospitals could affect the median ratios year to year (including the movement of credits from one rating category to another), there are some broader trends of note. While most of the children's hospital ratios improved over the prior year's children's medians and relative to this year's stand-alone hospitals, particularly for the 'AA' category children's hospitals, there is some noise in operating margins for the 'A' category. Specifically, operating margins for 'A' category children's hospitals have decreased year over year for the last three years. Operating margins for the 'AA' rated children's hospitals dipped slightly in 2017 but recovered in 2018 close to 2016 levels. Excess margins are generally better than our stand-alone hospitals for both rating categories as most of our children's hospitals continue to have healthier unrestricted reserves that contribute to good non-operating investment income.
The balance sheet ratios have been a little more mixed over time and relative to our stand-alone portfolio. For our strong rated credits in the 'AA' category, we note decline in key liquidity and financial flexibility metrics, mainly days' cash on hand and unrestricted reserves-to-long-term debt due to high levels of capital spending; however, our 'A' rated children's hospitals saw improvement in these metrics. Historically, children's hospital medians (across both the operating and non-operating side) have tended to exhibit much stronger overall ratios than the broader group of stand-alone hospitals. While that relationship continues for many of the ratios (particularly on the balance sheet ratios for 'AA' category rated credits), the differences are not as substantial now and in fact, some of the 'A' category debt related ratios are weaker than those of stand-alone hospitals.
While we view ratio analysis as an important tool in our assessment of the credit quality of not-for-profit hospitals and health care systems, it is only one of several factors that we take into consideration. Our analysis of the enterprise profile is as important. However, median ratios offer a snapshot of the financial position of our rated hospitals and help in the comparison of credits across rating categories. In addition, we believe tracking median ratios over time allows for a clearer understanding of industrywide trends and provides a tool to better assess the sector's future credit quality. Because of the intertwining of mission and operations among all members of an organization, the financial statements we generally use for the medians and our analyses are the system wide results, which include results for obligated and non-obligated group members.
|U.S. Not-For-Profit Children’s Hospital Medians -- 2018 vs. 2017|
|Statement of operations|
|Net patient revenue (NPR; $000)||953,206||1,037,684||979,781||812,055|
|Salaries & benefits/NPR (%)||61.5||63.1||55.5||53.7|
|Maximum annual debt service coverage (x)||7.5||6.6||4.5||4.8|
|Operating lease-adjusted coverage (x)*||5.1||4.7||3.7||3.5|
|Debt burden (%)||2.1||2.2||3.1||3.5|
|Nonoperating revenue/total revenue (%)||3.7||3.3||3.2||3.8|
|EBIDA margin (%)||16.3||14.7||12.6||15.0|
|Operating EBIDA margin (%)||12.0||11.9||9.1||12.0|
|Operating margin (%)||5.6||4.0||2.6||3.6|
|Excess margin (%)||9.1||8.0||6.9||8.2|
|Capital expenditures/depr. & amort. exp. (%)||157.9||175.5||147.5||113.0|
|Average age of plant (years)||9.2||8.9||9.2||9.7|
|Cushion ratio (x)||47.2||43.9||27.5||17.7|
|Days' cash on hand||363.1||415.4||265.9||254.1|
|Days in accounts receivable||57.3||53.4||56.7||59.2|
|Cash flow/total liabilities (%)||27.8||26.9||19.3||18.2|
|Unrestricted reserves ($000)||1,099,513||1,046,301||623,702||583,229|
|Unrestricted reserves/long-term debt (%)||327.1||346.0||168.0||130.3|
|Unrestricted reserves/contingent liabilities (%)*||1,003.8||960.4||738.2||544.4|
|Contingent liabilities/long-term debt (%)*||27.0||29.0||15.3||31.1|
|Long-term debt/capitalization (%)||18.6||18.6||31.2||32.5|
|DB pension funded status (%)*||95.3||87.3||76.8||N/A|
|Pension-adjusted long-term debt/capitalization (%)*||18.7||19.8||31.2||32.5|
|*These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities. N/A--not applicable.|
|U.S. Not-For-Profit Children’s Hospital Medians vs. Stand-Alone Hospital Medians By Rating Category -- 2018|
|Children's hospitals||Stand-alone hospitals||Children's hospitals||Stand-alone hospitals|
|Statement of operations|
|Net patient revenue (NPR; $000)||953,206||927,115||979,781||436,980|
|Salaries & benefits/NPR (%)||61.5||58.7||55.5||55.9|
|Maximum annual debt service coverage (x)||7.5||6.2||4.5||4.2|
|Operating lease-adjusted coverage (x)*||5.1||4.9||3.7||3.4|
|Debt burden (%)||2.1||2.1||3.1||2.7|
|Nonoperating revenue/total revenue (%)||3.7||3.1||3.2||2.5|
|EBIDA margin (%)||16.3||14.2||12.6||11.5|
|Operating EBIDA margin (%)||12.0||11.0||9.1||9.0|
|Operating margin (%)||5.6||4.5||2.6||2.4|
|Excess margin (%)||9.1||8.5||6.9||5.1|
|Capital expenditures/depr. & amort. exp. (%)||157.9||128.6||147.5||120.3|
|Average age of plant (years)||9.2||11.0||9.2||11.3|
|Cushion ratio (x)||47.2||37.3||27.5||24.4|
|Days' cash on hand||363.1||319.7||265.9||256.8|
|Days in accounts receivable||57.3||53.3||56.7||46.2|
|Cash flow/total liabilities (%)||27.8||23.7||19.3||19.1|
|Unrestricted reserves ($000)||1,099,513||890,575||623,702||292,196|
|Unrestricted reserves/long-term debt (%)||327.1||275.1||168.0||195.0|
|Unrestricted reserves/contingent liabilities (%)*||1,003.8||788.4||738.2||606.9|
|Contingent liabilities/long-term debt (%)*||27.0||37.1||15.3||30.8|
|Long-term debt/capitalization (%)||18.6||20.2||31.2||26.9|
|DB pension funded status (%)*||95.3||90.6||76.8||81.6|
|Pension-adjusted long-term debt/capitalization (%)*||18.7||23.1||31.2||29.1|
|*These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities.|
- Not-for-Profit Acute Health Care Ratios: 2018 Medians Show Operating Margin Improvement But Are Otherwise Stable, Sept. 4, 2019
- U.S. Not-For-Profit Acute Health Care Stand-Alone Hospital Median Financial Ratios -- 2018 vs. 2017, Sept. 4, 2019
- U.S. Not-For-Profit Health Care System Median Financial Ratios -- 2018 vs. 2017, Sept. 4, 2019
- U.S. Not-For-Profit Health Care Small Stand-Alone Hospital Median Financial Ratios -- 2018 vs. 2017, Sept. 4, 2019
- U.S. Not-For-Profit Acute Health Care Speculative Grade Median Financial Ratios -- 2018 vs. 2017, Sept. 4, 2019
- U.S. Not-For-Profit Health Care 2019 Sector Outlook: Stable Overall, Yet Key Risks Remain, Jan. 10, 2019
Glossary of our ratios
- Glossary: Not-For-Profit Health Care Organization Ratios, March 19, 2018
Monthly rating changes
- U.S. Not-For-Profit Health Care Rating Actions, July 2019
- U.S. Not-For-Profit Health Care Rating Actions, June 2019
- U.S. Not-For-Profit Health Care Rating Actions, May 2019
- U.S. Not-For-Profit Health Care Rating Actions, April 2019
- U.S. Not-For-Profit Health Care Rating Actions, March 2019
- U.S. Not-For-Profit Health Care Rating Actions, February 2019
- U.S. Not-For-Profit Health Care Rating Actions, January 2019
- U.S. Not-For-Profit Health Care Rating Actions, December 2018
- U.S. Not-For-Profit Health Care Rating Actions, November 2018
- U.S. Not-For-Profit Health Care Rating Actions, October 2018
- U.S. Not-For-Profit Health Care Rating Actions, September 2018
- U.S. Not-For-Profit Health Care Rating Actions, August 2018
- U.S. Not-For-Profit Health Care Rating Actions, July 2018
This report does not constitute a rating action.
|Primary Credit Analyst:||Chloe A Pickett, Centennial (1) 303-721-4122;|
|Secondary Contacts:||Suzie R Desai, Chicago (1) 312-233-7046;|
|Martin D Arrick, San Francisco (1) 415-371-5078;|
|Anne E Cosgrove, New York (1) 212-438-8202;|
|Research Contributors:||Prashant Singh, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
|Adwait Chandsarkar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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