- Small hospitals' ratings are skewed toward the lower end of the spectrum compared to all stand-alone hospitals given inherent risks associated with small hospitals, including small medical staffs and often small and narrow-based economies.
- The outlook distribution for small hospitals is consistent with the outlook distribution for the overall stand-alone sample.
- Compared to 2017, 2018 individual rating level results for the small hospital sample vary by rating level with a combination of improvement and declines.
- Compared to the broad stand-alone universe, balance sheet metrics including days' cash on hand, unrestricted reserves to long term debt and leverage, are significantly better. Operating margins; however, vary by rating category. Generally, small hospitals need to have stronger financial metrics than their larger stand-alone counterparts to achieve comparable ratings.
2018 vs. 2017
Overall, compared to 2017, 2018 individual rating level results for the small hospital sample size vary by rating level with a combination of improvement and declines. In general, small hospital credits in 2018 are characterized by thin but better than breakeven margins (with the exception of 'BBB+' and speculative grade credits). Operating margins were a bit mixed versus 2017, with stability and clear improvement for 'BBB', 'BBB-' and speculative grade ratings, while overall 'A' category and 'BBB+' medians declined. Excess margins improved in 2018 for 'BBB', 'BBB-', and speculative grade medians, and declined in the overall 'A' rating category and 'BBB' rating level.
Maximum annual debt service (MADS) coverage and balance sheet metrics have generally improved compared to 2017 at the lower rating levels and been stable or close to stable at the higher rating levels with the exception of 'BBB' ratings, which saw a decline. Days' cash on hand improved across the board with the exception of small hospitals in the overall 'A' rating category and was level for the 'BBB' rating level. Unrestricted reserves to long-term debt declined with the exception of small hospitals in the speculative rating categories, although unrestricted reserves to long-term debt was stable for 'BBB' ratings. Leverage was also generally stable, although there was an uptick in the 'BBB-' rating level. Lastly, defined benefit pension funded status improved across the board with the exception of small hospitals at the 'BBB+' rating level (see table 1).
Broad Trends: Small Hospitals vs. Stand-Alone Hospitals
There are some broad trends within the small stand-alone hospital category. Most notably, when compared to the stand-alone hospital sample, small hospitals generally have stronger MADS coverage (with the exception of small hospitals rated in the overall 'A' rating category). Notably, balance sheet metrics are significantly better for the small hospital group versus larger stand-alone providers, including days' cash on hand, unrestricted reserves-to-long-term debt, and leverage. Operating margins for small hospitals vary but are generally better except for those in the overall 'A' rating category and 'BBB+' rating level. However, excess margins for small hospitals are generally significantly better than their larger stand-alone counterparts across the rating levels as most of our small hospitals continue to have healthier investment incomes due largely to their favorable levels of unrestricted reserves (see table 2).
Small Hospitals Skewed Toward The Lower Portion Of The Rating Spectrum
S&P Global Ratings defines a small stand-alone hospital, a subset of our stand-alone hospital universe, as having annual total operating revenues of less than $150 million. Given the inherent volatility due to risks associated with a small hospital, ratings tend to be skewed toward the lower end of the spectrum compared to all stand-alone hospitals in the sample size. Our medians are also volatile given the generally small sample size for this provider segment.
Rating And Outlook Distribution
S&P Global Ratings has outstanding ratings on 36 small hospitals, with just 26% rated in the 'A' category compared to 39% rated in the 'BBB' category and 35% rated in the speculative grade categories. This contrasts with the larger category of stand-alone hospitals with 60% rated in the 'A' category or higher, 29% rated in the 'BBB' category, and 11% in the speculative grade categories (see chart 1). Overall, our sample size of rated small hospitals--based on 2018 audited financials--has declined by two small hospitals since last year. For individual rating levels in the 'A' category, the sample size is too small to be effectively reported at each rating level; hence, in tables 1 and 2, the medians are shown for the rating category as a whole. We expect the number of small hospital ratings to remain the same or even decline given continued industry revenue and competitive pressures and continued consolidation.
In general, small hospitals face unique risks that differentiate them from their larger stand-alone counterparts. Typical risks associated with small hospitals include weaker enterprise profiles, inclusive of demographics and economic characteristics, as well as reliance on a small physician base for patient utilization. Given their reliance on a small physician base, small hospitals are often vulnerable to inpatient-to-outpatient shifts in volumes, physician turnover, and recruitment issues. In addition, many of the small hospitals we rate operate in rural services areas; their small service areas and often limited service profile are a limiting rating factor. Furthermore, given that total operating revenues are less than $150 million, small hospitals typically have limited opportunities to offset revenue pressures or reduce costs during periods of operating stress. As a result, in order to offset these inherent risks, small hospitals generally need to have stronger financial metrics than their larger stand-alone counterparts to achieve comparable ratings.
The outlook distribution for small hospitals is consistent with the outlook distribution for the overall stand-alone sample (see chart 2). As of Aug. 15, 2019, 79% of small hospitals carried a stable outlook, compared to 78% of the entire stand-alone hospital universe; 14% of small hospitals carried a negative outlook, compared to 16% of the entire stand-alone hospital universe.
While we view ratio analysis as an important factor in our assessment of the credit quality of not-for-profit hospitals and health care systems, it is only one of several factors we take into consideration. Our analysis of the enterprise profile of our providers is imperative; however, median ratios offer a snapshot of the financial position of our rated providers and provide a general comparison of credits across rating categories. Furthermore, we believe tracking median ratios on an annual basis provide a clearer understanding of health industry-wide trends and provide a means to better assess the sector's future credit quality. Due to the intertwined nature of a provider's mission and operations among all members of the organization, the audited financial statement we use for our median ratio analysis are system-wide results, including both obligated and non-obligated group members.
|U.S. Not-For-Profit Small Hospital Medians -- 2018 vs. 2017|
|Statement of operations|
|Net patient revenue (NPR; $000)||103,376||96,715||110,414||132,285||87,074||85,843||68,430||75,462||81,105||74,285|
|Salaries & benefits/NPR (%)||56.8||54.3||59.7||60.4||58.2||52.5||53.9||56.9||53.6||51.2|
|Maximum annual debt service coverage (x)||3.8||4.0||3.0||3.0||3.2||4.0||2.5||1.6||2.5||1.7|
|Operating lease-adjusted coverage (x)*||3.6||3.8||2.6||2.7||2.7||3.4||2.4||1.6||2.5||1.6|
|Debt burden (%)||3.0||2.8||3.4||3.5||3.7||3.0||5.2||3.4||4.1||5.0|
|Nonoperating revenue/total revenue (%)||3.2||4.4||2.7||2.5||1.8||3.1||1.9||1.7||0.6||0.9|
|EBIDA margin (%)||13.2||14.9||13.6||8.8||11.2||12.2||12.9||8.1||10.0||6.8|
|Operating EBIDA margin (%)||8.6||11.1||7.4||6.5||9.0||8.9||11.2||6.5||6.6||6.2|
|Operating margin (%)||2.0||4.5||(2.7)||0.4||1.6||1.6||1.4||(2.5)||(0.1)||(1.6)|
|Excess margin (%)||7.4||8.3||4.2||3.0||3.1||5.3||3.3||(1.2)||2.0||(0.2)|
|Capital expenditures/depr. & amort. exp. (%)||126.2||134.8||80.7||82.3||107.1||87.0||34.3||91.3||34.6||67.3|
|Average age of plant (years)||12.5||13.6||16.1||13.0||14.2||13.1||11.6||11.3||10.5||10.6|
|Cushion ratio (x)||32.4||33.9||24.2||22.9||20.0||21.7||12.4||13.9||7.9||6.2|
|Days' cash on hand||320.5||368.3||360.1||269.4||245.8||246.6||264.6||179.1||108.8||98.4|
|Days in accounts receivable||47.6||48.6||51.5||46.3||47.2||49.0||50.7||49.4||49.0||47.3|
|Cash flow/total liabilities (%)||30.2||32.4||18.6||17.6||19.9||23.1||13.7||9.9||13.3||7.3|
|Unrestricted reserves ($000)||70,027||76,503||98,325||80,498||55,862||55,858||50,343||34,689||24,200||20,539|
|Unrestricted reserves/long-term debt (%)||284.8||301||254.5||264.0||250.3||252||129.9||165.1||82.9||53.0|
|Long-term debt/capitalization (%)||20.1||15.1||23.0||25.6||20.6||22.3||37.4||32.9||45.6||47.9|
|DB pension funded status (%)*||99.4||94.6||84.4||87.6||100.3||96.2||94.1||78.1||77.2||70.1|
|Pension-adjusted long-term debt/capitalization (%)*||20.1||15.1||25.4||26.1||20.1||23.3||36.9||32.9||45.6||47.8|
|*These three ratios are only for organizations that have defined-benefit (DB) pension plans or operating leases. **Includes hospitals rated 'A-' through 'A+' for both 2018 and 2017.|
|U.S. Not-For-Profit Small Hospital Medians vs. Stand-Alone Hospital Medians -- 2018|
|Statement of operations|
|Net patient revenue (NPR; $000)||103,376||436,980||110,414||303,750||87,074||299,875||68,430||359,335||81,105||142,380|
|Salaries & benefits/NPR (%)||56.8||55.9||59.7||58.4||58.2||57.9||53.9||56.9||53.6||52.3|
|Maximum annual debt service coverage (x)||3.8||4.2||3.0||2.6||3.2||2.7||2.5||2.3||2.5||1.8|
|Operating lease-adjusted coverage (x)*||3.6||3.4||2.6||2.4||2.7||2.3||2.4||2.0||2.5||1.6|
|Debt burden (%)||3.0||2.7||3.4||3.4||3.7||3.4||5.2||3.7||4.1||4.1|
|Nonoperating revenue/total revenue (%)||3.2||2.5||2.7||2.2||1.8||1.0||1.9||1.5||0.6||0.7|
|EBIDA margin (%)||13.2||11.5||13.6||8.8||11.2||8.7||12.9||8.3||10.0||8.1|
|Operating EBIDA margin (%)||8.6||9.0||7.4||7.2||9.0||7.8||11.2||5.6||6.6||6.9|
|Operating margin (%)||2.0||2.4||(2.7)||(0.1)||1.6||0.8||1.4||0.3||(0.1)||0.4|
|Excess margin (%)||7.4||5.1||4.2||2.4||3.1||2.4||3.3||1.8||2.0||1.7|
|Capital expenditures/depr. & amort. exp. (%)||126.2||120.3||80.7||111.8||107.1||102.3||34.3||170.8||34.6||68.0|
|Average age of plant (years)||12.5||11.3||16.1||13.1||14.2||12.5||11.6||14.2||10.5||11.7|
|Cushion ratio (x)||32.4||24.4||24.2||16.8||20.0||12.7||12.4||10.1||7.9||6.0|
|Days' cash on hand||320.5||256.8||360.1||207.9||245.8||142.2||264.6||133.6||108.8||93.9|
|Days in accounts receivable||47.6||46.2||51.5||51.5||47.2||44.5||50.7||48.1||49.0||49.0|
|Cash flow/total liabilities (%)||30.2||19.1||18.6||13.3||19.9||14.3||13.7||8.9||13.3||7.7|
|Unrestricted reserves ($000)||70,027||292,196||98,325||165,129||55,862||106,629||50,343||127,280||24,200||40,407|
|Unrestricted reserves/long-term debt (%)||284.8||195.0||254.5||132.5||250.3||136.3||129.9||76.3||82.9||60.4|
|Long-term debt/capitalization (%)||20.1||26.9||23.0||34.0||20.6||31.2||37.4||45.8||45.6||52.3|
|DB pension funded status (%)*||99.4||81.6||84.4||89.8||100.3||88.2||94.1||83.7||77.2||69.6|
|Pension-adjusted long-term debt/capitalization (%)*||20.1||29.1||25.4||34.5||20.1||33.0||36.9||47.0||45.6||52.2|
|*These three ratios are only for organizations that have defined-benefit (DB) pension plans or operating leases. **Includes hospitals rated 'A-' through 'A+'.|
- 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 Children's 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:||Aamna Shah, San Francisco (1) 415-371-5034;|
|Secondary Contacts:||Wendy A Towber, Centennial (1) 303-721-4230;|
|Anne E Cosgrove, New York (1) 212-438-8202;|
|Martin D Arrick, San Francisco (1) 415-371-5078;|
|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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