S&P Global Ratings maintains 21 public ratings on Texas not-for-profit acute care providers. This includes health care systems, stand-alone hospitals, and hospital districts.
Given that the state and locality in which providers operate greatly influence health care delivery, from underlying demographic trends to the legislative and competitive environment, market-specific factors provide a critical backdrop for our analysis of an entity's overall credit profile. This report is intended to provide greater insight into a sample of credits in comparison to their peers across the country and to supplement our top-level and national credit views on the not-for-profit health care sector (see "Outlook For U.S. Not-For-Profit Acute Health Care: Navigating The Bumps While Getting Back On Track," published Jan. 12, 2021, on RatingsDirect).
What We're Watching
Strong COVID-19 performance, recovery. Financially, rated providers in Texas have so far weathered the COVID-19 pandemic and recovery quite well. On one end, many hospital districts had their strongest financial years in recent memory, aided by steady tax revenue, lower uninsured volumes (and therefore uncompensated care costs), and surplus earnings at their sizable health plan arms. Accordingly, based on 2020 results, hospital districts generally led the sample in terms of year-over-year improvement in key metrics including operating margin, days' cash on hand, unrestricted reserves to long-term debt, and leverage. Beyond hospital districts, we have seen the state benefit from a strong rebound in demand after the suspension of non-emergent procedures in spring 2020, aided by flexible guidelines from the state regarding reopening and managing COVID-19 surges. Provider relief funds under the CARES Act were also a critical supporting factor. Most providers have not seen meaningful payor mix erosion, and higher acuity care continues to bolster revenue as volumes remain below the pre-pandemic baseline.
Vaccination rates across many parts of the country, Texas included, are slowing and the long-term impact of not reaching herd immunity remains an open question. Consistent with providers nationally, we believe volume normalization and expense flexibility remain critical to underlying operating performance once all CARES Act provider relief funds are recognized.
Favorable economic fundamentals. Most rated Texas providers benefit from the state's comparatively high population and employment growth, which has continued to fuel capital expenditures on added capacity and new greenfield care sites in budding communities even as meaningful competition remains present in all the urban markets. The state's urban areas continue to expand with heavy in-migration, supporting local economic strength and strong property tax revenues for hospital districts, though this growth has also increased demands on infrastructure, health care included. While exposure to oil and gas activities persists, we note that greater economic diversity has made the state more resilient than in decades past. Most rated credits manage the uninsured population--the nation's largest--by utilizing supplemental funding programs and expanding footprints in areas with commercially insured residents, providing cash flow to help counter uncompensated care costs and also support broader mission-driven goals including improved access and population health. Our state sample includes few small and truly rural providers operating in areas with weak demographics. These entities are more exposed to the financial challenges facing the state's rural providers, many of which have closed over the past decade.
Market and portfolio expansion. Most credits have been able to balance heavy capital spending, necessitated by population growth and competition, with stability in unrestricted reserves. This has been aided by strong annual cash flow, solid investment market returns, and many providers taking advantage of attractive borrowing rates to finance larger capital projects. Favorable growth projections and market opportunities have drawn providers to move outside of their traditional service areas, such as Texas Children's and Baylor Scott & White Health both entering the Austin region. Texas is not a certificate of need state, a key regulatory characteristic of the health care market which allows hospitals and health systems to expand their physical footprint more easily.
In recent years merger and acquisition activity within the state has mostly been one-off stand-alone hospital acquisitions. With rated Texas health systems generally having strong cultural identities and sound financial footing, it is difficult to predict if and when the next supra-regional merger activity among providers might occur. Aside from traditional asset purchase or full member substitution arrangements among providers, the state has seen new affiliations with its academic institutions in recent years, including Texas Health Resources with UT Southwestern and Baylor Scott & White Health with Baylor College Medicine and Texas A&M University. These are in addition to many long-standing academic partnerships throughout the state. We view these partnerships as a differentiator given they support high-acuity patient care, as well as educational and research activity, which is less vulnerable to disruption, in our view.
Clinical alignment, fee-for-service prevalence, provider-sponsored health plans. The combination of Texas' strong independent physician presence, volume-based reimbursement, and the need to offset uncompensated care costs, provides upward pressure on health care spending across the state. The landscape continues to attract private equity and external interest, though at the same time health systems across the state are increasing alignment with physicians to better manage costs and insulate themselves from competition, both traditional and non-traditional. We believe health care affordability will return to the forefront following the pandemic, and most large providers have quite meaningful exposure to population health and risk arrangements. The largest urban hospital districts, for example, manage their care within expected tax revenues to minimize costly, unnecessary care for their county-based service areas. In addition, almost half of all rated Texas providers operate a health plan, which was a crucial hedge during COVID-19 and remains a key asset for long-term strategies. As with providers nationally, we will be watching how quickly the move to value occurs, particularly given the entrenchment of fee-for-service arrangements that makes the status quo both lucrative and perhaps vulnerable to disruption.
Medicaid and supplemental funding. Texas is one of 12 states that has not elected to expand Medicaid under the Affordable Care Act. The impact of this varies when assessing urban, rural, or suburban markets, and therefore is not equal across all providers. Expansion of coverage would increase access for a large contingent of the state, and the magnitude of any effect from this would vary across providers. Currently, and helping offset the decision to not expand Medicaid, Texas Medicaid reimbursement is supplemented by funding from the state's 1115 waiver program, which is set to expire in September 2022 following the recent recission of a financially favorable 10-year extension granted by the previous administration in January 2021. Though time remains to develop an alternative, we will be watching what terms the state can negotiate with the current administration and if federal incentives to expand Medicaid affect the discussions given state-level resistance to such expansion. Though reliance varies, net supplemental funding comprises a material component of operating margins for almost all rated providers.
Environmental, social, and governance (ESG) risk factors. We believe ESG factors are embedded in much of the above. From an environmental standpoint, ESG risk has been most heightened along the Gulf Coast (such as rated Houston providers), in addition to more arid portions of the state that face extreme and persistent heat most acutely in the summer. That said, the severe winter storm, which hit nearly the entire state in February resulting in unstable power and water supply, affected up to two weeks of patient volumes for providers, in addition to causing generally manageable physical damage. Texas providers seem to have been insulated from elevated power costs experienced in parts of the state, though the loss of volume and added labor costs pressured February results for all those in the storm's path.
Social risk is generally on par with sector peers, as we consider the strong population and employment growth to offset the higher uninsured population, though this varies across credits. Typically social risk for health systems is viewed as lower than sector peers, whereas it is more often considered elevated for hospital districts given their high Medicaid and uninsured patient mix. Aside from the public hospital districts, defined-benefit pension plans are comparatively not common among Texas providers, and most credits do not have a meaningful organized labor component. Going forward, we expect health systems will continue to increase resources dedicated to social determinants of health and health equity within their service areas given the shortcomings exposed, and the initiatives accelerated, by the pandemic.
We view Texas' governance risk as being in line with the sector, though longer-term, the state's capacity to evolve its resiliency efforts from responsive to preventative will be a key credit consideration.
Table 1 lists all Texas-based not-for-profit acute health care providers rated under our "U.S. And Canadian Not-For-Profit Acute Care Health Care Organizations" criteria, published March 19, 2018. This group of credits has been stable in recent years, with three downgrades and one upgrade since the start of 2019. All rating changes and outlook revisions since 2019 have been for stand-alone hospitals (see table 2). The percentage of Texas credits on negative outlook is consistent with the not-for-profit acute health care sector as whole, though no ratings are currently on positive outlook. This is partly due to the fact that the rating distribution for Texas credits already skews higher, with 48% of credits in the 'AA' category compared with 25% for the sector as a whole (see chart 2 and chart 3).
In addition to the 21 Texas-based credits below, several out-of-state systems have a meaningful presence within the state, including Ascension Health Alliance, CommonSpirit Health, and Providence St. Joseph Health, as well as sizable footprints from for-profit systems such as HCA Healthcare and Tenet Healthcare. Other organizations with a health care presence in the state but excluded from the below include those covered under separate U.S. public finance criteria, including the University of Texas System and certain hospital districts that have outsourced operations to third parties.
|Texas Not-For-Profit Acute Health Care Ratings And Outlooks|
|Baylor Scott & White Health||AA-||Stable||System|
|Bexar County Hospital District||AA||Stable||Hospital district|
|Cook Children's Medical Center||AA||Stable||Stand-alone|
|Dallas County Hospital District||AA-||Stable||Hospital district|
|Dawson County Hospital District||CCC||Negative||Hospital district|
|Decatur Hospital Authority||BBB-||Negative||Stand-alone|
|Ector County Hospital District||BBB-||Negative||Hospital district|
|El Paso County Hospital District||BBB+||Stable||Hospital district|
|Guadalupe Regional Medical Center||BB||Stable||Stand-alone|
|Harris County Hospital District||AA-||Stable||Hospital district|
|Hendrick Health System||A||Stable||Stand-alone|
|Houston Methodist Hospital||AA||Stable||System|
|Hunt Memorial Hospital District||BBB+||Stable||Hospital district|
|Memorial Hermann Healthcare System||A+||Stable||System|
|Methodist Hospitals of Dallas||AA-||Stable||System|
|Peterson Regional Medical Center||A-||Stable||Stand-alone|
|Tarrant County Hospital District||AA||Stable||Hospital district|
|Texas Children's Hospital||AA||Stable||System|
|Texas Health Resources||AA||Stable||System|
|Winkler County Hospital District||BB+||Negative||Hospital district|
|All hospital districts are classified as stand-alone hospitals under our criteria. Rating and outlooks as of date of publication.|
|Texas Not-For-Profit Acute Health Care Rating Actions|
|Dawson County Hospital District||CCC||Stable||CCC||Negative||Favorable outlook revision||Smaller operating losses, structural changes|
|Decatur Hospital Authority||BBB-||Negative||BBB-||Stable||Unfavorable outlook revision||Continued weaker than expected operations|
|Ector County Hospital District||BBB||Stable||BBB||Negative||Favorable outlook revision||Improved cash flow and recent increase in unrestricted reserves|
|Guadalupe Regional Medical Center||BB||Stable||BB||Negative||Favorable outlook revision||Improved operating performance in 2018 and interim 2019|
|Hunt Memorial Hospital District||BBB+||Negative||A-||Stable||Downgrade||Significantly weakened balance sheet and continued modest operating losses|
|Peterson Regional Medical Center||A-||Stable||BBB+||Positive||Upgrade||Stronger debt metrics and improved operating performance|
|Winkler County Hospital District||BB+||Stable||AA||Watch Neg||Downgrade||Based on the application of the "U.S. And Canadian Not-For-Profit Acute Care Health Care Organizations" criteria|
|Dawson County Hospital District||CCC||Negative||CCC||Stable||Unfavorable outlook revision||Multi-credit outlook revision April 2020|
|Ector County Hospital District||BBB||Negative||BBB||Stable||Unfavorable outlook revision||Multi-credit outlook revision April 2020|
|Ector County Hospital District||BBB-||Negative||BBB||Negative||Downgrade||Operating deficit and revenue pressure|
|El Paso County Hospital District||BBB+||Stable||BBB+||Negative||Favorable outlook revision||Strong operating results and improved liquidity|
|Guadalupe Regional Medical Center||BB||Negative||BB||Stable||Unfavorable outlook revision||Multi-credit outlook revision April 2020|
|Guadalupe Regional Medical Center||BB||Stable||BB||Negative||Favorable outlook revision||Solid financial performance and stable liquidity|
|Hendrick Health System||A||Stable||A||Positive||Unfavorable outlook revision||Expected increases in capital spending with added debt likely|
|Hunt Memorial Hospital District||BBB+||Stable||BBB+||Negative||Favorable outlook revision||Improved liquidity and operations|
|Winkler County Hospital District||BB+||Negative||BB+||Stable||Unfavorable outlook revision||Multi-credit outlook revision April 2020|
|No rating or outlook changes in 2021 through date of publication.|
Given many of the above strengths, we observe nearly all medians for Texas providers to be stronger than the sector as a whole. In addition, an initial review of fiscal 2020 medians for Texas providers, which covers varying amounts of the pandemic depending on fiscal year-ends, makes clear that the entire sample has weathered the pandemic quite well so far (see table 3 and table 4). As applicable in 2020, and consistent with S&P Global Ratings practice, Medicare advance payments and other short-term borrowings are excluded from unrestricted reserves, contingent liabilities, and long-term debt. Recognized CARES Act provider relief funds are included in operating revenue, and many organizations entered their fiscal 2021 with substantial grants left unrecognized. Full 2020 medians for our entire acute health care portfolio will be published later this summer. One fiscal 2020 audit was unavailable for this report.
Since hospital districts can and do receive favorable notching to their anchor rating based on the explicit and implicit benefits of tax support, they have a generally dilutive effect on the medians, particularly for balance sheet metrics. From a performance standpoint, however, hospital districts proved accretive to the sample in 2020, with profitability measures comparatively stronger than their private peers.
The effect of hospital districts and provider-sponsored health plans among the sample is obvious when comparing median net patient revenue and total operating revenue. The large variance between these measures reflects the property tax revenue the larger, urban hospital districts collect, as well as the premium revenue many providers, several districts included, collect from their insurance arms. We believe this material and fairly widespread revenue diversity among Texas providers was a major factor behind the group's resilient performance during the pandemic, and expect it to continue to support the stronger-than-average rating distribution.
|Texas Not-For-Profit Acute Health Care Medians|
|Texas||Texas (excl. hospital districts)||All acute care|
|Statement of operations|
|Net patient revenue (NPR; $000)||826,168||672,236||774,703||1,941,967||1,974,783||1,814,669||922,974||746,999|
|Total operating revenue ($000)||1,498,955||1,428,087||1,510,874||3,189,434||3,013,671||2,805,380||1,014,342||MNR|
|Salaries & benefits/NPR (%)||59.3||59.9||58.5||57.8||52.8||53.4||56.7||56.8|
|Maximum annual debt service coverage (x)||4.2||3.7||3.5||4.6||4.8||4.2||3.9||4.0|
|Operating lease-adjusted coverage (x)*||3.9||3.1||2.9||3.8||3.7||3.1||3.2||3.1|
|Debt burden (%)||2.5||2.7||3.0||2.6||2.7||3.0||2.4||2.5|
|Nonoperating revenue/total revenue (%)||1.2||1.8||1.6||1.5||2.0||2.0||1.9||2.0|
|EBIDA margin (%)||10.4||11.1||9.1||11.4||11.3||10.5||10.0||10.3|
|Operating EBIDA margin (%)||9.3||8.8||7.5||9.3||9.6||8.8||8.4||8.3|
|Operating margin (%)||3.0||2.2||0.7||2.7||3.3||2.9||2.3||2.3|
|Excess margin (%)||5.2||4.6||2.6||5.4||5.3||5.3||4.1||4.1|
|Capital expenditures/depr. & amort. exp. (%)||108.8||103.3||127.3||123.8||142.5||166.6||119.3||122.8|
|Average age of plant (years)||11.5||11.1||10.5||10.7||10.7||10.3||11.5||11.3|
|Cushion ratio (x)||22.9||18.1||17.2||27.3||25.6||23.5||23.0||21.9|
|Days' cash on hand||218.6||209.1||199.8||277.5||240.5||261.7||210.2||216.7|
|Days in accounts receivable||40.6||43.9||43.4||41.1||43.1||46.7||47.6||46.8|
|Cash flow/total liabilities (%)||18.4||18.9||14.8||18.4||22.6||20.7||15.5||15.7|
|Unrestricted reserves ($000)||887,552||605,538||645,876||2,581,189||2,112,039||1,919,276||553,019||493,742|
|Unrestricted reserves/long-term debt (%)||258.3||162.4||144.4||293.1||256.1||224.8||181.5||168.6|
|Unrestricted reserves/contingent liab. (%)*||544.9||541.9||496.3||544.9||540.2||459.1||650.1||588.7|
|Contingent liabilities/long-term debt (%)*||29.9||30.1||30.9||31.6||30.9||32.5||28.7||31.8|
|Long-term debt/capitalization (%)||27.2||32.5||27.2||21.8||22.2||24.2||29.2||30.4|
|DB pension funded status (%)*||89.2||86.8||92.6||84.2||86.8||91.9||81.8||84.1|
|Pension-adjusted long-term debt/capitalization (%)*||29.5||34.4||28.0||21.8||22.2||24.2||31.7||31.7|
|*These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities. Includes stand-alone hospitals and health care systems. MNR--median not reported. Fiscal 2018, 2019, and 2020 medians are based on audited fiscal years, and ratings as of Aug. 15, 2019, June 30, 2020, and March 31, 2021, respectively.|
|Texas Not-For-Profit Health Care System Medians|
|Statement of operations|
|Net patient revenue (NPR; $000)||4,913,011||4,991,596||4,551,739||2,519,213||2,397,747|
|Total operating revenue ($000)||5,251,209||5,166,013||4,800,877||2,877,252||MNR|
|Salaries & benefits/NPR (%)||57.7||52.0||52.8||58.3||57.9|
|Maximum annual debt service coverage (x)||4.9||5.4||4.8||4.4||4.4|
|Operating lease-adjusted coverage (x)*||3.7||3.8||3.3||3.4||3.2|
|Debt burden (%)||2.6||2.7||3.0||2.2||2.2|
|Nonoperating revenue/total revenue (%)||1.5||2.2||2.0||1.9||1.7|
|EBIDA margin (%)||10.4||11.3||10.6||9.8||10.0|
|Operating EBIDA margin (%)||9.2||9.9||9.2||8.4||8.3|
|Operating margin (%)||2.3||4.4||3.2||2.7||2.3|
|Excess margin (%)||4.1||5.6||5.8||4.3||3.9|
|Capital expenditures/depr. & amort. exp. (%)||137.2||151.8||147.2||134.4||133.3|
|Average age of plant (years)||10.8||11.0||10.3||11.0||10.6|
|Cushion ratio (x)||30.4||26.9||24.5||25.1||24.0|
|Days' cash on hand||272.6||227.3||231.5||218.3||213.3|
|Days in accounts receivable||40.9||43.3||50.0||46.5||45.8|
|Cash flow/total liabilities (%)||17.2||21.8||25.6||14.9||14.3|
|Unrestricted reserves ($000)||3,479,171||2,941,736||2,718,896||1,604,728||1,484,081|
|Unrestricted reserves/long-term debt (%)||285.4||252.5||218.4||175.6||175.1|
|Unrestricted reserves/contingent liab. (%)*||520.3||538.5||422.0||645.8||594.1|
|Contingent liabilities/long-term debt (%)*||31.9||31.6||32.8||28.7||31.8|
|Long-term debt/capitalization (%)||22.2||22.8||24.3||31.6||31.7|
|DB pension funded status (%)*||81.5||84.9||91.0||81.8||84.8|
|Pension-adjusted long-term debt/capitalization (%)*||22.2||22.8||24.3||34.5||33.9|
|*These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities. MNR--median not reported. Fiscal 2018, 2019, and 2020 medians are based on audited fiscal years, and ratings as of Aug. 15, 2019, June 30, 2020, and March 31, 2021, respectively.|
This report does not constitute a rating action.
|Primary Credit Analyst:||Patrick Zagar, Farmers Branch + 1 (214) 765 5883;|
|Secondary Contacts:||Suzie R Desai, Chicago + 1 (312) 233 7046;|
|Oscar Padilla, Farmers Branch + 1 (214) 871 1405;|
|Stephen Infranco, New York + 1 (212) 438 2025;|
|Research Contributors:||Adwait Chandsarkar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
|Karan Shah, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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