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Not-For-Profit Acute Health Care State Snapshot: Maryland


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Not-For-Profit Acute Health Care State Snapshot: Maryland

S&P Global Ratings has 10 public ratings on Maryland not-for-profit acute-care providers, split evenly between health systems and stand-alone hospitals. We also rate Maryland-based Bon Secours Mercy Health, although we have excluded it from this ratio analysis because the system no longer operates acute-care hospitals in the state. Given that the state and location in which providers operate can significantly influence health-care delivery, from underlying demographic trends to the legislative and competitive environment, market-specific factors provide a crucial backdrop for our analysis of an entity's overall credit profile. This report aims to provide greater analytical insights from the sample of issuers compared with acute-care providers across the country and to supplement our top-level and national credit views on the not-for-profit health-care sector.

Chart 1


The Global Budget Is Strained After Years Of Stability

Maryland health-care providers operate under a unique waiver program, an all-payer-rate system (Maryland's Global Budget Agreement or Maryland's Medicare waiver) regulated by a state agency, the Health Services Cost Review Commission (HSCRC). Historically, HSCRC has set all rates for inpatient and outpatient cases at each hospital (for both commercial and governmental payers), with a goal to keep growth in cost per case below the national average growth for Medicare cases. In January 2014, the Centers for Medicare and Medicaid Services, through the organization's Center for Medicare and Medicaid Innovation, approved a waiver for Maryland for an initial five-year period. Under the 2014 waiver, HSCRC redesigned its payment system as a global budget model to fix revenues and include more incentives for hospitals to control unnecessary use and improve population health. Therefore, all Maryland hospitals are at risk for managing use and cost. However, global budgets could be adjusted for market share and population changes.

Although the program was not a full-risk or capitation model, the global budget shifted incentives to focus on appropriate volume and patients' health status and was an intermediate step toward population health. In addition, hospitals that reduced readmissions and other inappropriate use generated stronger profitability in the early years under the global budget program. A new waiver went into effect Jan. 1, 2019, for a 10-year term and expanded the global budget to a total cost-of-care model, shifting the focus beyond care in the traditional hospital setting, encouraging primary care providers to play an increased role in the prevention and management of chronic diseases, and seeking to further prevent unnecessary hospitalization.

Historically, we have viewed this payment system as providing stability, given the predictability of an established revenue base, and providers' challenge has been to manage volumes and expenses to maintain debt service coverage levels. The model also provided stability through the COVID-19 pandemic as the HSCRC took actions, including limiting revenue volatility through increased rate corridors and allowing providers to carry forward unreimbursed revenue into future fiscal years. However, a key tenet of the waiver establishes targets to keep Medicare cost growth in Maryland lower than national levels, which was not achieved in the past year. Therefore, the HSCRC has reduced rates to constrain cost growth and re-align with the waiver's targets, and many hospitals could see smaller revenue increases in the next calendar year. Although most of the providers rated by S&P Global Ratings have reported moderate reductions, the lower rates could further strain financial performance, particularly as the industry experiences ongoing staffing and inflationary pressure. Furthermore, if revenue growth remains stagnant and does not adequately offset rising expenses, or if management teams are unable to offset this with cost savings or efficiencies, providers could experience continued weakening operating performance and cash flow, which could lead us to lower ratings or revise outlooks to negative for many of the rated providers in the state. For more information on pressures we're monitoring for the overall sector, see "Outlook For U.S. Not-For-Profit Acute Health Care: A Long Road Ahead," published Dec. 1, 2022, on RatingsDirect.

Maryland's Strong Economic Indicators Benefit Health Care Organizations' Enterprise Profile Characteristics

Our rating on the state of Maryland is 'AAA', which is, in part, attributed to the state's very strong wealth and income indicators and a relatively diversified economic base that have contributed to its recent economic recovery and better-than-forecast revenue performance. Furthermore, employment is somewhat concentrated in the federal government sector, providing some stability to the economy, and limiting the effects on the state's economy during periods of economic expansion and contraction. For more information on the state rating, see our most recent full analysis, published March 8, 2023. Health-care systems and stand-alone hospitals operating within Maryland benefit from similar characteristics, exhibiting healthy economic fundamentals.

Despite the relatively small number of rated issuers in Maryland, these acute-care providers operate about half of the hospitals in the state and serve a broad range of service area populations, ranging from about 150,000 to more than 6 million. While there is limited reach beyond the state among the issuers we rate, some providers have geographic reach and facilities in nearby states, as well as a national draw for Maryland's well-regarded academic medical centers. A majority of the acute health-care providers in Maryland rated by S&P Global Ratings have economic fundamentals we consider very strong or strong based on their service area population, with those smaller providers in more rural regions considered adequate. Furthermore, given the state's economic strength, almost all Maryland providers exhibit neutral or positive economic indicators as per our criteria for population, employment growth, and per capita income compared with U.S. national averages, helping to support solid demand characteristics.

Maryland providers also exhibit solid market positions, with the majority scoring very strong and the rest strong. The state is home to well-known academic medical centers, including Johns Hopkins Health System and the University of Maryland Medical System. The state's model generally encourages providers to collaborate and lessens direct competition, particularly for inpatient care, although we still consider many markets in the state to be competitive. At times, aggressive growth and disruptions to patient patterns could result in delayed recalibration of the global budget to capture additional revenue. Furthermore, Maryland is a certificate-of-need state, which prohibits health-care providers from entering new markets or making changes to their existing capacity without first gaining the approval of state regulators. We also view the state's rate-setting program positively as the program diminishes the effect of the payer mix in our credit rating analysis. The state's providers also generally exhibit good quality scores, which are partially attributable to the global budget model's focus on population health. Along with generally solid management and governance scores, all of the rated Maryland providers have an overall enterprise profile score of strong or very strong, which is slightly better than that for the overall rated acute-care sector.

Modest Cash Flow And A Competitive Market Spur Higher Capital Expenditures And Elevated Debt Profiles

Maryland's unique payer system has historically afforded stability to financial metrics, although medians for key metrics are relatively weaker for state providers compared with those of the overall rated sector. Although operating margins have generally been stable and positive for Maryland providers, they are also slightly weaker compared with those of similarly rated peers operating in different states. Because revenue growth is generally more restrained, providers are incentivized to contain expenses, which can be seen in slightly lower salaries and benefits over net patient revenue compared with those of other providers that we rate. Given the limited flexibility on revenue growth, one-time impacts such as electronic medical record transitions or acquisitions could cause short-term operating pressure. Moderate operating income, combined with generally favorable nonoperating income, contributes to steady but modest cash flow, but typically limits any rapid or above-average growth in unrestricted reserves.

Many Maryland providers operate in large, competitive markets, spurring healthy capital investment. Capital expenditures and average age of plant have compared favorably with the overall sector; however, as historical cash flow tends to be below that of similarly rated organizations, providers tend to rely on a higher proportion of debt to fund capital investment, resulting in higher debt levels and debt-related metrics. In addition, slower appreciation in unrestricted net assets contributes to the somewhat weaker leverage. Unrestricted reserves-to-long-term debt, maximum annual debt service coverage, and debt burden are weaker than overall medians. Unrestricted reserves, however, have seen continual growth that, in conjunction with cost containment incentivized by the global budget model, generates days' cash on hand that is favorable compared with the overall sector in the past several years.

Fiscal 2022 medians highlight the expected trend of weakening financial performance, largely spurred by elevated labor expenses and inflation, as well as less stimulus funding. Unrestricted reserves have also deteriorated because investment market volatility has resulted in significant unrealized losses for many Maryland providers as well as the larger sector. Preliminary fiscal 2023 interim results indicate incremental improvement in financial performance and unrestricted reserves, although we anticipate expense pressures will persist through 2023 and potentially in future years.

As applicable in 2020, 2021, and 2022, and consistent with S&P Global Ratings' practice, Medicare advance payments and other short-term borrowings for operations are excluded from unrestricted reserves, contingent liabilities, and long-term debt. Recognized pandemic provider relief funds are included in operating revenue, and some organizations entered fiscal 2022 with some grants left unrecognized. Full 2022 medians for acute-health-care issuers rated by S&P Global Ratings will be published later this summer. One fiscal 2022 audit was unavailable for this report.

Table 1

Maryland not-for-profit acute health care medians
Maryland All acute care
2022 2021 2020 2019 2021 2020 2019
Sample size 9 10 10 10 391 399 395
Financial performance
Net patient revenue ($000s) 1,086,322 975,581 921,189 782,226 996,903 900,920 922,974
Total operating revenue ($000s) 1,132,511 1,125,855 1,005,897 813,812 1,176,202 1,046,825 1,014,342
Total operating expenses ($000s) 1,198,236 1,116,072 999,105 800,970 1,118,932 MNR MNR
Operating income ($000s) 8,968.0 34,873 (329) 13,921 26,168 MNR MNR
Operating margin (%) 0.6 2.8 0.0 1.4 2.8 1.6 2.3
Net nonoperating income ($000s) 46,527 24,664 14,329 18,358 34,789 MNR MNR
Excess income ($000s) 53,387 63,874 13,902 35,184 67,603 MNR MNR
Excess margin (%) 2.9 4.6 2.0 3.1 6.0 3.4 4.1
Operating EBIDA margin (%) 6.2 7.9 7.0 8.5 8.6 7.6 8.4
EBIDA margin (%) 9.0 10.3 8.6 9.9 11.7 9.5 10.0
Net available for debt service ($000s) 110,612 110,622 89,344 82,428 139,751 90,167 100,739
Maximum annual debt service ($000s) 36,313 37,510 37,510 37,510 26,402 MNR MNR
Maximum annual debt service coverage (x) 3.8 4.5 2.8 3.3 5.4 3.9 3.9
Operating lease-adjusted coverage (x) 3.2 3.3 2.5 2.7 4.1 3.1 3.2
Liquidity and financial flexibility
Unrestricted reserves ($000s) 522,658 592,213 439,354 393,942 819,247 680,185 553,019
Unrestricted days' cash on hand 217.1 256.3 204.3 219.7 250.0 232.9 210.2
Unrestricted reserves/total long-term debt (%) 140.6 149.6 109.0 125.4 211.7 192.5 181.5
Unrestricted reserves/contingent liabilities (%)* 458.0 490.2 326.8 318.3 895.9 775.4 650.1
Average age of plant (years) 11.9 11.9 11.6 10.6 12.2 11.8 11.5
Capital expenditures/depreciation and amortization (%) 123.9 117.1 117.2 105.2 107.4 112.9 119.3
Debt and liabilities
Total long-term debt ($000s) 434,739 534,328 515,892 468,241 360,330 MNR MNR
Long-term debt/capitalization (%) 38.5 38.6 45.8 44.6 27.8 29.9 29.2
Contingent liabilities ($000s)* 175,997 147,338 133,507 137,273 134,075 MNR MNR
Contingent liabilities/total long-term debt (%)* 26.1 28.8 31.1 36.1 25.7 26.6 28.7
Debt burden (%) 2.3 2.6 2.8 2.9 2.2 2.4 2.4
Defined-benefit plan funded status (%)* 99.5 83.9 76.4 81.3 91.4 80.7 81.8
Salaries & benefits/NPR (%) 58.6 56.6 58.1 56.0 57.6 60.2 56.7
Nonoperating revenue/total revenue (%) 3.5 1.6 1.4 1.7 2.9 1.8 1.9
Cushion ratio (x) 21.3 21.4 16.3 15.7 27.8 24.8 23.0
Days in accounts receivable 42.1 42.0 41.4 41.7 47.4 45.1 47.6
Cash flow/total liabilities (%) 10.7 12.9 7.2 10.0 16.1 11.6 15.5
Pension-adjusted long-term debt/capitalization (%)* 38.7 38.7 46.0 44.9 29.0 32.1 31.7
Nonrecurring operating income adjusted operating margin (%)§ 0.0 0.0 (3.3) MNR 0.6 (2.4) MNR
MNR--median not reported. *These ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities. §Nonrecurring operating income is largely attributable to COVID-19 stimulus funds recognized, but could be comprised of other non recurring items.

Maryland Issuer Ratings

Table 2 lists all Maryland-based not-for-profit acute health-care providers publicly rated under our "U.S. And Canadian Not-For-Profit Acute Care Health Care Organizations" criteria, published March 19, 2018.

Table 2

Maryland not-for-profit acute health care ratings and outlooks as of March 31, 2023
Obligor Rating Outlook Entity type
Adventist Healthcare BBB Stable System
Greater Baltimore Medical Center A Negative Stand-alone
Johns Hopkins Health System Obligated Group AA- Stable System
LifeBridge Health Inc. A+ Stable System
Luminis Health A Negative Stand-alone
MedStar Health Inc. A Stable System
Mercy Health Services BBB+ Positive Stand-alone
Meritus Health Inc. BBB+ Positive Stand-alone
TidalHealth Inc. A Negative Stand-alone
University of Maryland Medical System A Stable System

The rating distribution for Maryland providers skew to the middle of the rating scale in line with the broader portfolio, with the majority of issuers rated in the 'A' category. Three are rated in the 'BBB' category and one in the 'AA' category. There are no Maryland providers in the speculative-grade category, which is attributable to the general stability in financial metrics and strong enterprise characteristics.

Chart 2


There has been limited movement in ratings over the past several years, with just one upgrade since 2020, as well as one new issuer in 2021. Although ratings have remained relatively stable since 2021, there has been an uptick in outlook revisions, particularly through 2023, when we revised the outlooks on two providers to negative and revised the outlook on another to positive.

Table 3

Maryland not-for-profit acute health care rating actions
To From
Obligor Rating Outlook Rating Outlook Action
Adventist Healthcare BBB Stable NR NR New issuer
Meritus Health, Inc. BBB+ Positive BBB Stable Upgrade
No rating actions
Greater Baltimore Medical Center A Negative A Stable Revised outlook to negative
TidalHealth, Inc. A Negative A Stable Revised outlook to negative
Mercy Health Services BBB+ Positive BBB+ Stable Revised outlook to positive
*2023 Rating Actions through March 31, 2023

Although the number of issuers is relatively small, 50% of the ratings have a positive or negative outlook, compared with about 25% within the broader sector.

Chart 3


Elsa Berisha contributed research to this report.

This report does not constitute a rating action.

Primary Credit Analysts:Chloe A Pickett, Englewood + 1 (303) 721 4122;
Stephen Infranco, New York + 1 (212) 438 2025;
Secondary Contact:Suzie R Desai, Chicago + 1 (312) 233 7046;

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