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U.S. Not-For-Profit Health Care System Median Financial Ratios -- 2018 vs. 2017

Health care system medians for 2018 generally followed the trends displayed across the entire acute care sector. Overall median operating margins for health systems improved, reversing a multi-year decline, which started in 2016. However, maximum annual debt service (MADS) coverage declined slightly (see table 1), which is largely due to weaker non-operating income in 2018 following a strong non-operating year in 2017. Balance sheet metrics continued to remain broadly stable in 2018 with increasing unrestricted reserves and days' cash on hand and a stable debt profile, with slight reductions in leverage and contingent debt. In our view these trends are consistent with our stable outlook on the sector.

The median operating margin in 2018 showed improvement for the 'AA' and 'BBB' categories while it declined for the 'A' category. MADS coverage improved only for the 'AA' category. The trend is similar across investment grade rating levels, showing improvement in operating margin and debt service coverage for some rating levels accompanied by decline in these two metrics for remaining rating levels. Medians for speculative grade credits are quite volatile, but this is largely due to the very small size of the portfolio. In many ways the broad improvement—even if modest—in operating margins, despite widespread industry pressures, reflects strong, active management teams that have taken numerous steps over many years to remain focused on operating profitability.

Stabilization of operating margins provided some offset for weaker non-operating income, which largely consists of realized investment income and unrestricted philanthropy. Many health systems saw losses in their investment portfolios with weaker investment markets in December 2018. S&P Global Ratings views the chance of a recession over the next 12 months to be between 25% and 30%, up from a 20% to 25% probability earlier this year. With a recession would likely come a market correction, which would negatively affect investment earnings and cash flow and could create increased rating stress, depending on the length and severity of the recession and an organization's overall financial profile. Similarly, philanthropy, which is a small component of non-operating income, often slows during a recession. Systems typically hold large investment portfolios, and can rely on non-operating income in periods of weaker operations. Should investment returns weaken in the coming year, operating income trends will be an increasingly important source of cash flow and debt service coverage.

Net patient service revenue grew for all categories, reflecting system consolidation and the ongoing impact of mergers and acquisitions. Capital spending remained a high priority for our top rated providers as they continued spending on information technology, ambulatory care, and population health infrastructure to maintain a competitive edge and to combat threats like cyber-attacks. Median capital expenditure relative to depreciation and amortization improved for 'AA' category while it declined for the 'A' and 'BBB' categories, demonstrating the increased financial flexibility of more highly rated providers to invest in major capital projects. The overall system median for average age of plant remained stable between 10 and 11 years.

Balance sheet stability is supported by healthy growth in median unrestricted reserves across all rating levels except for 'A+'. However, the median ratio for days' cash on hand declined for all rating categories and most rating levels, signifying the impact of rising costs, which enlarge the organizational cost base and what constitutes a day of cash. Unrestricted reserves relative to debt and long-term debt to capitalization remained either stable or improved for all categories except for the 'A' category. In particular these two ratios deteriorated for 'AA+' and 'A' rated providers, as these providers issued additional debt and focused on capital spending as reflected by increased median capital expenditures to depreciation and amortization expense for 2018 compared to 2017.

Over the past three years, the rating distribution has remained relatively stable, with the vast majority of systems divided between the 'A' and 'AA' categories (see chart 1). S&P Global Ratings has outstanding ratings on 151 health care systems, of which 142 (94%) are included in the median ratios. At Aug. 15, 2019, we had just 16 health care systems (11%) rated below 'A-', compared with 40% of all stand-alone hospitals. This reflects the core strengths demonstrated by health care systems, including financial dispersion, geographic diversity, size, scale and generally larger and more experienced management teams.

The percent of stable outlooks rose in 2018, with over 90% of systems having a stable outlook (see chart 2). This indicates significant stability among rated systems, largely due to the core strengths mentioned above. In addition, rating stability for systems continues to reflect the benefits of merger and acquisition driven growth, which has improved overall enterprise profiles, an important rating component, for many years. We think the widened gap between negative outlooks versus positive outlooks reflects increasing revenue and expense pressures, as well as the shift of the health care delivery system to value from volume, which has constrained utilization and overall profitability for some providers. While these pressures fall on systems and stand-alone providers alike, we believe systems have a greater capacity to successfully manage these pressures and that can be seen in the lower level of negative outlooks for systems versus stand-alone providers. While operating margins have stabilized, significant pressures, including payor mix deterioration, increasing supply and labor expense, and legislative uncertainty, persist and could contribute to future downgrades, particularly if non-operating income is also weak. However, these negative pressures could be offset by the generally positive impact of mergers and acquisitions, which tend to improve enterprise profiles and balance sheets, both of which provide flexibility especially during periods of financial and industry uncertainty.

Ratio Analysis

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.

Chart 1

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Chart 2

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Table 1

U.S. Not-For-Profit Health Care System Medians (2011-2018)
Fiscal year 2018 2017 2016 2015 2014 2013 2012 2011
Sample size 142 144 146 142 140 138 143 143
Statement of operations
Net patient revenue (NPR; $000) 2,397,747 2,203,429 2,022,277 1,873,321 1,718,626 1,590,127 1,471,157 1,383,643
Salaries & benefits/NPR (%) 57.9 57.9 57.2 56.4 57.8 57.7 57.5 56.6
Maximum annual debt service coverage (x) 4.4 4.5 4.3 5.0 4.6 4.2 4.2 4.2
Operating lease-adjusted coverage (x)* 3.2 3.5 3.1 3.4 3.4 3.3 3.1 3.1
Debt burden (%) 2.2 2.2 2.3 2.3 2.4 2.6 2.7 2.8
EBIDA ($000) 282,188 265,041 223,165 278,605 247,243 204,975 198,121 192,370
Nonoperating revenue/total revenue (%) 1.7 2.1 1.1 2.0 2.6 2.5 1.8 2.0
EBIDA margin (%) 10.0 10.3 9.9 11.5 12.0 11.3 11.6 11.7
Operating EBIDA margin (%) 8.3 8.3 9.0 10.2 9.5 9.1 9.7 10.1
Operating margin (%) 2.3 2.2 2.4 3.6 2.9 2.2 2.9 2.9
Excess margin (%) 3.9 4.5 3.7 5.3 5.1 4.2 4.7 4.9
Capital expenditures/depr. & amort. exp. (%) 133.3 132.3 125.1 126.0 123.8 130.0 130.2 127.2
Balance sheet
Average age of plant (years) 10.6 10.8 10.6 10.5 10.4 10.5 10.4 10.2
Cushion ratio (x) 24.0 22.9 21.4 21.4 19.6 18.2 17.3 16.0
Days' cash on hand 213.3 205.5 197.6 205.5 203.1 204.6 193.8 188.8
Days in accounts receivable 45.8 47.8 48.2 48.0 48.1 50.2 50.8 49.5
Cash flow/total liabilities (%) 14.3 15.3 13.9 16.2 16.9 15.0 14.6 15.5
Unrestricted reserves ($000) 1,484,081 1,402,672 1,213,897 1,191,485 1,086,026 901,350 834,947 754,364
Unrestricted reserves/long-term debt (%) 175.1 173.3 169.5 161.0 153.4 141.5 137.3 133.7
Unrestricted reserves/contingent liabilities (%)* 594.1 546.3 507.6 462.6 451.2 N.A. N.A. N.A.
Contingent liabilities/long-term debt (%)* 31.8 33.2 31.9 34.4 36.7 N.A. N.A. N.A.
Long-term debt/capitalization (%) 31.7 32.3 34.0 33.7 34.6 35.1 39.2 38.1
DB pension funded status (%)* 84.8 81.0 74.0 78.2 82.0 83.6 68.7 73.6
Pension-adjusted long-term debt/capitalization (%)* 33.9 34.9 37.3 38.2 38.2 37.8 42.9 42.7
*These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities. N.A.--not available.

Table 2

U.S. Not-For-Profit Health Care System Medians By Rating Category -- 2018 vs. 2017
AA A BBB Speculative grade
Fiscal year 2018 2017 2018 2017 2018 2017 2018 2017
Sample size 66 64 60 66 14 11 2 3
Statement of operations
Net patient revenue (NPR; $000) 3,178,449 2,645,068 2,265,892 2,059,957 1,764,142 1,575,064 1,519,600 1,009,944
Salaries & benefits/NPR (%) 57.5 57.1 58.4 59.3 62.5 61.9 53.4 52.6
Maximum annual debt service coverage (x) 5.7 5.5 3.8 4.0 2.6 2.8 1.9 0.8
Operating lease-adjusted coverage (x)* 4.4 4.0 2.9 3.0 2.1 2.3 1.9 0.9
Debt burden (%) 2.0 2.0 2.4 2.5 2.1 2.2 4.5 3.5
EBIDA ($000) 427,269 394,597 214,879 227,926 94,422 104,995 192,894 31,843
Nonoperating revenue/total revenue (%) 2.4 2.4 1.4 1.9 1.2 1.7 0.6 1.3
EBIDA margin (%) 10.9 11.5 9.6 9.9 5.6 5.5 9.9 2.2
Operating EBIDA margin (%) 9.8 9.7 7.5 8.2 4.6 4.0 9.4 (0.3)
Operating margin (%) 3.6 3.2 1.5 1.8 0.0 (1.8) 5.1 (4.2)
Excess margin (%) 5.7 5.3 3.2 4.1 0.9 0.3 5.7 (2.1)
Capital expenditures/depr. & amort. exp. (%) 145.0 137.6 126.0 129.9 99.6 103.8 167.4 98.5
Balance sheet
Average age of plant (years) 10.2 10.0 11.5 11.5 11.4 10.8 16.6 14.3
Cushion ratio (x) 33.1 31.1 19.3 18.9 17.9 15.8 4.2 4.1
Days' cash on hand 270.0 279.0 179.2 183.4 127.5 153.8 80.9 47.6
Days in accounts receivable 46.6 48.7 45.1 46.0 42.6 43.3 46.2 62.0
Cash flow/total liabilities (%) 18.5 17.4 13.2 14.0 7.9 8.6 9.7 0.5
Unrestricted reserves ($000) 2,836,706 2,365,959 1,179,006 1,087,815 667,950 575,071 360,675 149,206
Unrestricted reserves/long-term debt (%) 219.6 218.9 142.3 152.3 134.1 129.4 57.4 26.5
Unrestricted reserves/contingent liabilities (%)* 614.0 582.6 568.1 507.0 422.2 535.4 2,299.2 1,282.2
Contingent liabilities/long-term debt (%)* 40.2 40.7 25.7 29.5 18.5 20.3 1.5 2.0
Long-term debt/capitalization (%) 26.4 26.1 35.1 36.1 37.8 39.7 55.8 68.7
DB pension funded status (%)* 90.5 83.4 80.5 79.9 80.5 76.1 73.5 65.3
Pension-adjusted long-term debt/capitalization (%)* 27.6 29.3 38.0 38.6 43.2 42.5 61.2 68.7
*These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities.

Table 3A

U.S. Not-For-Profit Health Care System Medians By Rating Level -- 2018 vs. 2017
AA+ AA AA- A+
Fiscal year 2018 2017 2018 2017 2018 2017 2018 2017
Sample size 6 7 23 22 37 35 28 30
Statement of operations
Net patient revenue (NPR; $000) 4,071,473 3,949,400 3,224,352 2,959,918 2,875,242 2,403,147 1,763,656 1,833,016
Salaries & benefits/NPR (%) 52.1 53.2 58.1 57.6 57.4 57.1 56.6 58.3
Maximum annual debt service coverage (x) 9.4 7.4 6.4 6.5 4.8 4.8 4.4 4.4
Operating lease-adjusted coverage (x)* 5.9 5.5 4.7 4.6 3.3 3.5 3.2 3.6
Debt burden (%) 1.6 1.7 1.9 1.9 2.1 2.2 2.2 2.3
EBIDA ($000) 733,661 813,086 576,957 499,394 340,456 337,797 201,349 221,992
Nonoperating revenue/total revenue (%) 3.3 4.0 2.5 2.7 2.0 1.8 1.5 2.1
EBIDA margin (%) 14.8 16.2 12.4 13.5 10.4 10.8 10.1 9.6
Operating EBIDA margin (%) 12.0 12.6 10.1 10.4 9.5 8.7 7.4 7.9
Operating margin (%) 5.5 5.2 4.4 3.6 3.4 2.6 1.6 1.8
Excess margin (%) 9.2 9.6 6.7 7.4 4.9 4.5 3.3 3.7
Capital expenditures/depr. & amort. exp. (%) 159.9 137.4 153.2 154.6 135.3 131.4 120.3 125.7
Balance sheet
Average age of plant (years) 8.3 8.7 10.5 10.3 10.2 9.7 10.9 11.2
Cushion ratio (x) 61.2 52.4 39.4 39.5 26.5 25.2 21.1 20.7
Days' cash on hand 433.6 424.3 314.1 341.8 234.5 243.2 186.0 188.6
Days in accounts receivable 48.0 46.7 51.7 53.2 45.0 48.0 44.7 45.5
Cash flow/total liabilities (%) 22.1 22.0 21.2 19.3 15.7 15.7 15.1 16.0
Unrestricted reserves ($000) 5,276,407 5,138,713 3,565,073 3,055,984 2,037,800 1,813,269 941,089 1,079,145
Unrestricted reserves/long-term debt (%) 302.4 349.0 264.0 259.9 194.7 187.7 161.8 164.0
Unrestricted reserves/contingent liabilities (%)* 954.9 808.9 843.1 758.2 576.0 509.1 578.4 631.7
Contingent liabilities/long-term debt (%)* 40.6 43.8 41.5 44.1 39.3 39.6 30.4 26.0
Long-term debt/capitalization (%) 23.6 19.1 22.7 23.3 28.5 29.2 31.9 33.1
DB pension funded status (%)* 93.2 94.5 88.2 86.1 88.6 81.3 84.9 85.6
Pension-adjusted long-term debt/capitalization (%)* 25.4 19.5 23.3 25.2 30.5 32.3 33.5 35.1
*These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities.

Table 3B

U.S. Not-For-Profit Health Care System Medians By Rating Level -- 2018 vs. 2017
A A- BBB+ BBB/BBB-** Speculative grade
Fiscal year 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017
Sample size 23 25 9 11 10 9 4 2 2 3
Statement of operations
Net patient revenue (NPR; $000) 2,696,397 2,302,771 2,010,148 1,967,303 1,853,921 1,602,943 1,718,699 1,505,176 1,519,600 1,009,944
Salaries & benefits/NPR (%) 59.7 59.4 64.7 60.2 61.1 61.9 62.5 61.5 53.4 52.6
Maximum annual debt service coverage (x) 3.5 4.0 3.2 3.2 2.8 2.8 2.1 2.0 1.9 0.8
Operating lease-adjusted coverage (x)* 2.7 3.0 2.4 2.5 2.3 2.3 1.8 1.6 1.9 0.9
Debt burden (%) 2.5 2.5 2.4 2.7 2.1 2.2 1.7 3.1 4.5 3.5
EBIDA ($000) 273,620 239,291 215,399 174,352 120,844 111,119 89,476 85,212 192,894 31,843
Nonoperating revenue/total revenue (%) 1.3 1.9 1.3 1.2 1.9 2.0 0.4 1.2 0.6 1.3
EBIDA margin (%) 8.6 10.1 8.3 11.0 6.1 5.5 4.2 5.2 9.9 2.2
Operating EBIDA margin (%) 7.6 8.1 7.8 8.8 5.0 4.0 3.9 4.0 9.4 (0.3)
Operating margin (%) 2.1 1.7 1.0 2.0 0.1 (1.8) (0.4) (1.1) 5.1 (4.2)
Excess margin (%) 3.3 4.1 2.5 4.1 1.0 0.3 0.3 0.1 5.7 (2.1)
Capital expenditures/depr. & amort. exp. (%) 128.6 119.7 159.0 173.3 89.4 87.7 159.2 194.1 167.4 98.5
Balance sheet
Average age of plant (years) 12.1 11.6 13.1 13.3 11.0 10.5 13.4 14.3 16.6 14.3
Cushion ratio (x) 18.8 19.0 13.7 11.9 18.0 15.9 16.4 8.0 4.2 4.1
Days' cash on hand 175.8 184.4 135.2 149.3 152.9 156.2 80.6 80.5 80.9 47.6
Days in accounts receivable 46.5 47.7 44.2 45.1 42.1 43.3 44.8 44.3 46.2 62.0
Cash flow/total liabilities (%) 11.6 14.4 12.5 11.9 8.5 9.2 5.2 5.5 9.7 0.5
Unrestricted reserves ($000) 1,441,898 1,245,545 1,122,312 883,401 704,582 638,819 421,526 345,323 360,675 149,206
Unrestricted reserves/long-term debt (%) 136.6 142.9 96.2 88.2 148.8 141.9 73.6 57.6 57.4 26.5
Unrestricted reserves/contingent liabilities (%)* 555.2 416.9 565.5 643.9 553.9 535.4 295.7 552.7 2,299.2 1,282.2
Contingent liabilities/long-term debt (%)* 24.9 37.5 19.3 18.6 31.8 31.2 14.9 10.7 1.5 2.0
Long-term debt/capitalization (%) 40.2 37.3 45.9 46.2 36.8 35.3 46.8 113.9 55.8 68.7
DB pension funded status (%)* 77.0 78.3 80.6 80.0 79.7 77.4 94.8 73.3 73.5 65.3
Pension-adjusted long-term debt/capitalization (%)* 43.0 43.7 45.9 48.6 41.3 42.5 48.7 115.8 61.2 68.7
*These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities. **Includes one 'BBB-' and three 'BBB' rated systems in 2018 and one of each in 2017.

Related Research

  • 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 Small Stand-Alone Hospital 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:Allison Bretz, Chicago (1) 303-721-4119;
allison.bretz@spglobal.com
Secondary Contacts:Patrick Zagar, Farmers Branch (1) 214-765-5883;
patrick.zagar@spglobal.com
Anne E Cosgrove, New York (1) 212-438-8202;
anne.cosgrove@spglobal.com
Martin D Arrick, San Francisco (1) 415-371-5078;
martin.arrick@spglobal.com
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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