articles Ratings /ratings/en/research/articles/200109-u-s-not-for-profit-health-care-2020-sector-outlook-a-precarious-balance-as-evolution-continues-11292008 content esgSubNav
In This List

U.S. Not-For-Profit Health Care 2020 Sector Outlook: A Precarious Balance As Evolution Continues


Historical Peak Of Negative Outlooks Signals Challenges Remain For U.S. Not-for-Profit Acute Health Care Providers


Table Of Contents: S&P Global Ratings Credit Rating Models


U.S. Local Governments And School Districts Still Benefit From Stimulus As The Clock Ticks Down


Criteria | Governments | U.S. Public Finance: Advance Notice Of Proposed Criteria Change: Methodology For Rating U.S. Governments

U.S. Not-For-Profit Health Care 2020 Sector Outlook: A Precarious Balance As Evolution Continues


S&P Global Ratings expects that the U.S. not-for-profit health care sector will continue to see challenges and pressures, but stable credit quality for a vast majority of our rated organizations is supported by healthy balance sheets; ongoing focus on cost cutting initiatives; revenue cycle optimization; and selective growth, particularly around the growing aging population, combined with entry into new partnerships and business initiatives. Providers continue to ready their organizations for some form of value and risk-based reimbursement although it has yet to become a meaningful part of revenues and income for most. Given the myriad of forces, including legislative and policy uncertainty, evolving trends in the sector, and the likelihood that operating margins will remain at a new lower, but stable level, we believe that the sector's equilibrium and stability remain delicately balanced with the expectation that management teams must remain vigilant and proactive to sustain existing operating and business strength.

We expect the type of rating performance shown in 2019 and discussed below will likely be repeated in the coming year with continued bifurcation of the stronger and weaker credits. Moreover, we continue to expect that the lower-rated providers could face additional stress, because some of the benefits around improved business position, balance sheet strength, and the emerging stability in operating margins, are harder to achieve among them. The traditional credit quality split between 'AA' category providers and those in the 'BBB' category and below continues to manifest itself with more downgrades and negative outlook revisions to lower-rated providers, which often lack the financial or managerial depth to compete as effectively as higher-rated providers. We have also noted that although the majority of stand-alone providers have stable ratings and performance, stand-alone hospitals are more likely to be negatively affected by broad industry operating stress as compared with health care systems that are both more highly rated, but also characterized by greater dispersion of risk given their broader operating footprints.

Overview Of Sector Ratings

Rating changes and performance in 2019 begin to highlight bifurcation of credit quality

The performance of S&P Global Ratings' not-for-profit health care sector, including both acute health care systems and stand-alone hospitals, was decidedly mixed in 2019. While roughly 87% of all ratings were unchanged, downgrades exceeded upgrades (chart 1). However, health care systems saw slightly more upgrades than downgrades, as stand-alones accounted for the majority of the downgrades (chart 2). The dichotomy between the performance of health care systems versus stand-alone hospitals is even greater given there are more rated stand-alone entities than rated health care systems although the vast majority of all ratings continue to be affirmed (chart 3). Outlooks tend to follow a similar trend as stand-alone hospitals have a greater percentage of negative outlooks than systems and the ratio of negative outlooks to positive outlooks is higher than systems as well (chart 4). All of that said, the rating distribution of our stand-alone hospitals and systems largely similar to prior years and while systems tend to be skewed to the higher end of the rating spectrum and approximately 60% of stand-alone hospitals maintain an 'A-' or higher rating, almost 40% of stand-alone hospitals are in the 'BBB' and below rating categories--indicating some increased credit risk among the stand-alone providers (chart 5). In addition, positive outlook revisions (back to stable from negative, or to positive from stable) exceeded negative outlook revisions--further supporting our stable outlook (chart 6).

Chart 1


Chart 2


Chart 3A


Chart 3B


Chart 4A


Chart 4B


Chart 5


Chart 6


Chart 7


Rating changes also point to a fundamental gap in credit quality and volatility between highly rated organizations in the 'A' or 'AA' categories, versus those in the 'BBB' and speculative rated categories (chart 7). As can be seen by the chart, and in general, lower rated organizations were more likely to be downgraded than upgraded and were also more likely to be stand-alone providers than health care systems. In our view health care systems generally benefit from larger size and scale, and greater dispersion of revenues and geographies. Thriving stand-alone providers, many of which are rated in the 'AA' category, tend to be larger than average and often have very strong enterprise profiles or dominance in key service lines.

In fact, given the industry pressures and the capital investments required to compete in the future, the number of rated stand-alone providers has declined while the average size of health care systems has grown steadily over time (chart 8). The enlargement of existing systems is often a credit positive in our view given their growing geographic and revenue diversity, synergy opportunities and in some cases, enhanced market presence. However, we evaluate merged systems on a variety of factors and at times, increased leverage relating to acquisitions or problems with integrating new assets has caused rating pressure. While stand-alone hospitals are upgraded at times, their performance has fluctuated a bit more and their ratings are not as highly skewed as health systems. Over a longer time horizon overall rating distributions have remained broadly stable.

Chart 8


What We're Watching For In 2020

Balance sheet strength--a key factor in credit stability

Balance sheet metrics remain at or close to record levels, especially for highly rated providers (chart 9). Financially this provides considerable cushion, in our view, offsetting the tepid operating margins that are depressed from the peaks of 2015. In addition, the potential for a recession appears a bit more muted than earlier in 2019, but still a moderate risk with our current expectation of a recession in the 25%-30% range. Organizations have built up very healthy balance sheets with good investment results, sound cash flow (chart 9), and more limited capital spending. In addition, management teams have used their balance sheet strength to invest in new areas and deal with unexpected issues as the industry continues to be in a period of significant change and legislative and policy scrutiny.

Chart 9


Capital expenditures have increased but have remained stable over the past few years at just over 1.2x depreciation with debt related metrics remaining stable. Providers have continued to restrain their spending toward large brick and mortar projects and shift focus toward spending on information technology, virtual and telehealth capabilities, data analytics, and ambulatory sites and physician clinics. We expect this pattern to continue at an increasing pace over the next few years as organizations have pivoted toward customer, digital, and technology oriented strategies that management teams expect will drive down costs, improve care, and potentially open up new revenue streams. Renewal and replacement in buildings will, of course be required to enable new technologies, with some capital additions and investments particularly at the busier providers servicing the more complex tertiary and quaternary levels of care.

While overall debt metrics have generally improved incrementally over the past few years, the current favorable interest rate environment--for both taxable and tax-exempt issuance--has driven a very heavy issuance calendar recently, which we expect to continue into the near future.

Likely a new normal for operating margins, and an increased dependency on non-operating income for some organizations

We believe operating margins are stabilizing at new, although lower levels compared with a few years ago (chart 10). Preliminary information from 2019 supports generally stable financial metrics that are consistent with the 2018 medians. Nonoperating income--primarily investment and philanthropic income--supports healthy debt service coverage, with many organizations showing noticeably weaker coverage in soft investment market years. We monitor this dependency and to the extent that the markets falter or a recession emerges, this, along with the weakening of balance sheets, could cause broader credit pressure. Philanthropy also dips in recessions.

Chart 10


As mentioned above, we expect to see continued challenges to operating margins due to increases in wages, supplies, and drug costs at the same time that reimbursement rate increases are anemic and there is more exposure to governmental payors both as the population ages into Medicare and as several additional states discuss expansion of Medicaid. Bad debt and uncompensated care also continue to be a pressure point as the shift to high deductible health plans continues. Management teams note that certain information technology systems--like electronic health records--can be expensive to operate, too. As most hospitals' revenues have shifted to a majority coming from outpatients as inpatient volume declines continue, management teams have had to effectively manage profitability levels with a very different mix of services. The aging population, however, also provides some increasing demand for services so this will likely be a partial offset to the declining inpatient volume. As inpatient business becomes more focused on high end complex services with case mix indexes continuing to rise for most providers, we believe that inpatient volumes will increasingly be more oriented toward tertiary and quaternary providers, which will also favor academic medical centers.

Providers' margins have increasingly been supported by various governmental programs including supplemental payment programs (among them provider fee programs and intergovernmental transfers) as well as the federal 340b specialty drug program which allows certain qualified providers to acquire outpatient drugs at reduced prices. These programs, and other similar supplemental programs, continue to be reviewed by the government as efforts to find savings, and to the extent that providers' profitability becomes more and more reliant on these funds, we believe that they could have increased exposure to the risk of cuts to governmental programs.

Management and governance: ability to adapt and to maintain financial and business strength

In our view, the agility of management teams remaining resilient and adaptive at managing through widespread and ongoing operating pressures and industry evolution is one of the sector's persistent strengths. As challenges such as reimbursement, expense growth, and payor shifts continue to present themselves to acute care providers, adept governance and management teams have begun to focus on innovative ways to improve the patient experience as well as reduce costs using newer technologies such as artificial intelligence and data analytics. Increasingly, we've seen providers also look outside the health care space for management talent and to enlist nontraditional partners, including some from outside the industry, to help transition an organization in the key strategic areas of customer orientation, incorporation of data analytics, implementation of new technologies, and different methods of care delivery.

There are many examples of management and governance being proactive. At its most basic level, a decision to merge into another organization frequently creates stability and credit quality improvement despite some loss of independence. Service line extensions, vast increases in outpatient footprints, and working with nontraditional providers where possible are other examples of proactive choices by management. We have also seen many organizations taking a more assertive position in developing and reaping the benefits of intellectual property being created within their organizations, as well as more direct investment in new technologies. Further, many of the most widely known "brand names" in the sector are extending their brands overseas in a variety of models which ultimately aim to improve and diversify overall performance.

Innovation provides opportunities to manage costs and improve care delivery

There continues to be an abundance of companies trying to help physicians and acute providers adapt to evolving health care trends with the use of technological advancements, including artificial intelligence and data analytics. This includes both large companies like Google and Apple, as well as smaller startups backed by private equity and venture capital. Insurance companies partnering with pharmacy benefit managers are also changing their competitive footprint. Larger providers have established innovation funds to help gain access to many of these technologies and also to invest in development of ideas within their own organizations. While it is not clear which technology companies will remain in the sector for the long term, these companies provide potential opportunities for acute care providers to form joint ventures or partnerships to innovate and potentially help reduce costs, improve patient care, and reduce friction on customer and patient strategies.

For example, we've increasingly heard of efforts to roll out "hospital at home" models, which rely on providers going to homes and using technology, in-home support and telehealth capabilities to manage and monitor certain types of patient care. These various tools could help in managing costs related to the care delivery process as well as to administrative functions although we are still in the early stages to gauge the effectiveness on many of these efforts. Innovation centers have helped to create focus and a testing environment for new ideas. However, there has to be other management and governance structures that are in place to make any successful transformation part of the fabric of the organization.

Larger hospitals situated in broadly rural settings have used technology and innovation, including telehealth capabilities, to increase access and support for some, though definitely not all, of the health care in the outlying region. This approach continues evolving. The incorporation of new, rapidly developing home monitoring capabilities further improves some of the services that can be provided remotely in parts of the country that have a difficult time recruiting the needed providers and maintaining the necessary training and support.

The use of data to help improve care delivery has increasingly been a topic of interest to hospital and system CFOs. Through partnerships and investment in data analytics, providers are trying to both better predict health care needs and improve treatments, to reduce the cost and improve the quality of health care. These tools and strategies are still nascent but we believe that management teams will continue to look for opportunities to incorporate technologies to manage care at lower margins and improve quality and effectiveness of treatments. These technology investments can range in size and scope but can be meaningful for those in the forefront.

Enterprise profiles continue to lend credit stability through M&A and physician integration

The improvement in enterprise profiles reflects the long-term benefits from mergers and acquisitions, physician integration, and ambulatory and outpatient investments as well as an ongoing array of diversifying joint ventures as management teams have reached out to others to broaden their service profiles and increase their customer oriented capabilities.

Merger and acquisition activity continues to remain active and has often supported favorable rating changes, although not all merger activity is viewed favorably. Approximately just under a third of the upgrades and two downgrades in 2019 were related to mergers. Any updated rating(s) after a merger or acquisition incorporates our group rating methodology criteria which reflects the new system's combined financial performance (including non-obligated affiliates and systems with multiple obligated groups under a common parent), and the relationship of each rated entity to the group as a whole. The generally favorable merger and acquisition related rating actions support our opinion that mergers and acquisitions typically are a credit positive event. While we expect merger activity to continue through 2020, it could slow somewhat depending on available opportunities but also due to federal and state regulators who are increasingly expressing views that these transactions reduce competition and, as a result, could be contributing to rising health care costs. Regulators seem to be playing a heightened role in many transactions and approvals are often coming with certain conditions about future operations.

In our view, mergers offer opportunities for meaningful cost reduction, important managerial or technical synergies, and improved leverage with payers and suppliers. Therefore, many smaller or poorly performing providers often seek the expertise, stability and safety that a more diverse and resource rich enterprise can offer. Mergers and acquisitions frequently improve our assessment of a provider's enterprise profile by virtue of the organization's expanded service area or stronger market. As well, these larger organizations can provide a broader patient and revenue base to undertake potentially beneficial pilot initiatives and programs to remain competitive and ahead of evolving health care trends. The relative size of balance sheet resources and diversity of cash flows also provide larger organizations the flexibility to absorb the cost of developmental efforts. Our assessment in these cases reflects the benefits of financial and geographic risk diversification, membership in larger and often more cost-effective organizations, and in some cases the direct assumption of debt by a more highly rated obligated group. But bigger does not always mean better. While larger organizations do have some inherent advantages, management's execution of its strategy remains essential in our analysis.

Nontraditional organizations currently focused on primary care and outpatient services

With the continued evolution of nontraditional competitors, these types of organizations are poised to capture a great share of the non-inpatient health care market. One of their most salient characteristics is that they eschew inpatient care. Many of America's largest and most widely recognized companies are enhancing their health care service options--in some cases for direct services as well as in other "adjacent" services lines, often related to "wellness," broadly defined. While these initiatives may or may not reduce overall inpatient activity, the sharp increase in competition for ambulatory services and competition for patient or "customer" loyalty, has become important enough to be a clear threat to overall performance and growth of traditional health care systems. This is especially important as the growing calls for price transparency imply a much harder time raising prices in an already price constrained atmosphere.

In our view, health care providers are trying to counter these forces by increasing their efforts to build more customer and patient friendly capabilities that will help capture patients, but also better flag and manage the high cost patients. These efforts often involve use of improved data analytics including machine learning algorithms. In addition, acute care providers are also focusing on lower acuity sites of care by expanding and adding ambulatory sites, micro-hospitals, and home health and even "hospital at home" and other lower-cost-of-care settings. Smaller organizations may have advantages in being nimble and reducing friction for patients. In many respects the increase in joint ventures, often with nontraditional companies, but also more traditional service line relationships, supports our view that management teams have been making the adjustments required to keep these forces in balance. However, we expect these issues to intensify, threatening this balance, as we think that the nontraditional providers will accelerate their efforts to make inroads into the primary care and outpatient space given the evolution of technology and employers' and government's focus on reducing health care cost growth.

Social determinants of health remain a focus for many

We expect there to be continued interest by organizations to address the social determinants of health, including housing, transportation, and food security, which could involve some investment, although there have been a broad range of approaches to addressing these issues. Acute care providers are working with community organizations to address many of these issues given the mission of most not-for-profit hospitals is to improve the health of their communities. Hospitals' further integration in communities through efforts to focus on coordinating care could create an advantage not just from a cost reduction perspective but in embedding the acute care providers as important partners for a community's overall wellness and health. The current reimbursement system that most providers still rely on (fee for service) does not effectively reward these kinds of investments. Integrated reimbursement models (capitated and risk-based models), offer better incentives for social spending. Therefore, over the near term, to the extent that there are integrated providers (capitated risk-based models) with insurance subsidiaries or increasing exposure to Medicare Advantage plans, these efforts should help providers maintain financial strength while improving care for their communities. Of course, the slowly increasing level of funding for social determinants of health continues as the benefits align with the mission of most of our rated providers.

Legislative and policy changes have a heightened focus in an election year

The recent decision by the U.S. 5th Circuit Court of Appeals in the Texas v. Azar lawsuit upheld the ruling that the individual mandate in the Affordable Care Act (ACA) is unconstitutional (given that Congress waived the penalty for those not obtaining insurance), but also asked the Northern District of Texas court to re-review its decision that the entire ACA law is unconstitutional. We expect that this will likely take some time to resolve. If the ACA were declared unconstitutional, it would effectively end many of key provisions of the ACA that benefited hospitals including the expansion of health care coverage for millions of Americans, as well as the current requirement that insurance companies must insure individuals with pre-existing conditions. Many expect this will be further appealed to the Supreme Court. A decision to effectively end the ACA would have serious negative consequences to the health care sector as well as to the many Americans who would lose their health care insurance coverage.

In the current environment, we continue to see ongoing challenges for eligible individuals to gain insurance through the individual health insurance exchange or expanded Medicaid programs. Certain actions such as state work rules and shorter enrollment windows can cause incremental difficulties for eligible individuals to gain access to insurance. In addition, the decision to not enforce the penalty for the individual mandate is another action which has contributed to stabilizing the uninsured population rather than reducing it. The advent of association health plans or other plans that are not ACA compliant has further burdened individuals with higher out of pocket costs and deductibles. Ultimately, all of these actions can affect providers through increased bad debt expense and uncompensated care as individuals remain uninsured or underinsured.

All the candidates for president have focused on health care. It is difficult to factor into our outlook potential changes to the ACA, as well as proposals such as "Medicare For All" or "Medicare For More" because of the limited details available and an unpredictable approval and enactment process. However, we believe further weakening of the ACA would likely be unfavorable while plans to build on the existing ACA framework appear incrementally positive to the sector. We expect that health care will continue to remain a key policy focus in the years to come as the country looks for ways to improve coverage while managing the overall health care spending levels.

This report does not constitute a rating action.

Primary Credit Analysts:Suzie R Desai, Chicago (1) 312-233-7046;
Martin D Arrick, San Francisco (1) 415-371-5078;
Secondary Contacts:Cynthia S Keller, New York (1) 212-438-2035;
Kenneth T Gacka, San Francisco (1) 415-371-5036;
Patrick Zagar, Farmers Branch (1) 214-765-5883;
Research Contributor:Alexander Nolan, Centennial (1) 303-721-4501;

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, (free of charge), and and (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

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:

Register with S&P Global Ratings

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

Go Back