S&P Global Ratings maintained 24 ratings without revising the outlooks, took two negative rating actions, and revised five outlooks unfavorably without changing the ratings in the U.S. not-for-profit health care sector in June.
There were three new issuances in the month, with all three ratings and outlooks unchanged. There were no upgrades or favorable outlook revisions.
The seven rating actions consist of the following:
- Two downgrades on two stand-alone hospitals, one in the 'A' category and one that was downgraded four notches into speculative grade; and
- Five unfavorable outlook revisions on both stand-alone hospitals (3) and health care systems (2), all within the 'A' and 'AA' categories.
Table 1
| U.S. not-for-profit health care rating action summary, year to date 2023 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First quarter | April | May | June | Second quarter | Year to date | |||||||||
| Maintained | 61 | 20 | 31 | 24 | 75 | 136 | ||||||||
| Downgrades | 14 | 7 | 0 | 2 | 9 | 23 | ||||||||
| Upgrades | 4 | 1 | 3 | 0 | 4 | 8 | ||||||||
| Unfavorable outlook revisions | 13 | 2 | 4 | 5 | 11 | 24 | ||||||||
| Favorable outlook revisions | 2 | 2 | 1 | 0 | 3 | 5 | ||||||||
| Excludes CreditWatch placements and removals totaling one in January, three in February, three in April, and one in May as well as developing outlooks. | ||||||||||||||
Second-quarter rating actions slightly less volatile compared with first quarter
We maintained ratings and outlooks on three-quarters of issuers reviewed during the second quarter compared with two-thirds of issuers reviewed during the first quarter of 2023 indicating growing rating stability. For the 13 rating changes this quarter, downgrades were more than double upgrades and for the 14 outlook revisions, unfavorable revisions were almost 4x higher than favorable revisions. The negative actions reflect ongoing pressures that we highlighted in our 2023 midyear update for the not-for-profit acute-health care sector (see "U.S. Not-For-Profit Health Care Midyear Update 2023: Out Of Intensive Care And On The Path To Recovery Amid Ongoing Operating Challenges", published June 28, 2023, on RatingsDirect).
Twenty unfavorable rating and outlook actions during the second quarter affected both systems and stand-alone providers and occurred at all investment-grade and speculative-grade rating levels. About two-thirds of the actions were among stand-alone providers, with around half occurring in the 'A' category. There was also one default on Beverly Community Hospital in California that was downgraded twice from 'CCC-' to 'C' and then to 'D' when it missed a debt service payment. Unsurprisingly, these actions were primarily driven by operating losses and weaker cash flow, mostly due to labor inflation and for those with less balance-sheet cushion.
The far fewer 7 upgrades and favorable outlook revisions during the second quarter were on a diversified portfolio of health care systems and stand-alone hospitals mostly in the investment grade categories and located in eastern states. While most of the positive actions related to healthy operating performance, two of the three upgrades were related to the formation and rating of Advocate Health following the combination of Advocate Aurora Health and Atrium Health.
While the level of losses and extent of challenges vary significantly across issuer type and markets and even quarter by quarter, there has been broad based financial and operating pressure with significant rating volatility through 2022 that has continued to some extent into 2023. We believe our 2022 medians, when published in August, will show significant balance sheet weakening both because of the investment market performance and higher expense bases from labor and supply inflation that deflate days' cash on hand. We also anticipate materially thinner margins and light debt service coverage reflecting revenue constraints from staffing and throughput issues as well as heightened expenditures on contact labor, premiums, and bonuses, all of which have contributed to a higher rate of covenant compliance issues in 2022 compared with historical levels.
Chart 1
Chart 2
Rapid deterioration abating, but longer recovery expected
We believe the significantly negative financial results experienced through most of 2022 have started to moderate, but performance is still weak with a slow recovery expected due largely to stubborn labor market issues that are proving to be difficult to resolve quickly. We expect that providers will continue to underperform financially relative to pre-pandemic levels and while this will result in a continued trend of downgrades and negative outlooks, balance sheet flexibility and enterprise profile strength can be mitigating factors. As of June 30 most of our health care portfolio is stable, however 22% of our ratings are on negative outlook (compared with just 5% on positive) indicating continued rating pressure.
Table 2
| June 2023, U.S. not-for-profit health care rating actions | ||||||
|---|---|---|---|---|---|---|
| Hospitals | State | Rating | Outlook | Entity type | Action | Description |
| Adena Health System | OH | A- | Negative | Standalone | Unfavorable outlook revision | Material decline in unrestricted reserves, weaking balance sheet metrics, and operating losses with a slow recovery expected |
| AHS Hospital Corporation | NJ | AA- | Stable | System | Maintained | Credit quality consistent with existing rating |
| Ann & Robert H. Lurie Children's Hospital of Chicago | IL | AA- | Stable | Standalone | Maintained | Credit quality consistent with existing rating |
| Banner Health | AZ | AA- | Stable | System | Maintained; new sale | Credit quality consistent with existing rating |
| Cincinnati Children's Hospital Medical Center | OH | AA | Stable | Standalone | Maintained | Credit quality consistent with existing rating |
| East Alabama Medical Center | AL | A | Stable | Standalone | Maintained | Credit quality consistent with existing rating |
| El Paso County Hospital District | TX | BBB+ | Stable | Standalone | Maintained | Credit quality consistent with existing rating |
| Highland Hospital of Rochester | NY | A | Stable | Standalone | Maintained | Credit quality consistent with existing rating |
| Inova Health System Foundation | VA | AA+ | Stable | System | Maintained; new sale | Credit quality consistent with existing rating |
| INTEGRIS Baptist Medical Center Obligated Group | OK | A | Negative | System | Unfavorable outlook revision | Widened operating losses with pressure expected to continue through 2024 coupled with a weakened balance sheet |
| Intermountain Health Care | UT | AA+ | Stable | System | Maintained | Credit quality consistent with existing rating |
| Kaiser Foundation Hospitals (Kaiser Permanente) | CA | AA- | Stable | System | Maintained | Credit quality consistent with existing rating |
| LifeBridge Health, Inc | MD | A+ | Stable | System | Maintained | Credit quality consistent with existing rating |
| Lifespan Obligated Group | RI | BBB+ | Stable | System | Maintained | Credit quality consistent with existing rating |
| Lucile Salter Packard Children's Hospital at Stanford | CA | A+ | Stable | Standalone | Maintained | Credit quality consistent with existing rating |
| Memorial Hermann Health System | TX | A+ | Stable | System | Maintained | Credit quality consistent with existing rating |
| Nebraska Methodist Health System | NE | A | Stable | System | Maintained | Credit quality consistent with existing rating |
| NJH-SJH Center for Outpatient Health | CO | AA | Stable | System | Maintained | Credit quality consistent with existing rating |
| Northbay Healthcare System Obligated Group | CA | BBB- | Negative | Standalone | Maintained | Credit quality consistent with existing rating |
| Northwestern Memorial HealthCare | IL | AA+ | Stable | System | Maintained | Credit quality consistent with existing rating |
| Norton Healthcare | KY | A | Stable | System | Maintained; new sale | Credit quality consistent with existing rating |
| Oregon Health & Science University | OR | AA- | Negative | Standalone | Unfavorable outlook revision | Multiyear operating losses and increased reliance on special funding |
| Rochester Regional Health | NY | BBB+ | Stable | System | Maintained | Credit quality consistent with existing rating |
| St Clair Memorial Hospital of Pittsburgh | PA | AA- | Negative | Standalone | Unfavorable outlook revision | Multiyear trend of declining operating margins while the balance sheet provides less cushion |
| Thomas Jefferson University | PA | A | Negative | System | Unfavorable outlook revision | Persistent operating losses resulting in thin debt service coverage and weakened reserves |
| Tucson Med Ctr | AZ | A | Negative | Standalone | Maintained | Credit quality consistent with existing rating |
| UMass Memorial Health Care Inc | MA | BBB+ | Positive | System | Maintained | Credit quality consistent with existing rating |
| UNC Southeastern Regional Medical Center | NC | BB | Negative | Standalone | Downgrade | Significant balance sheet weakening due to integration with UNC Health and operating pressures which are expected to persist |
| Vail Health | CO | A | Stable | Standalone | Downgrade | Pressured operating performance and deterioration in key balance sheet metrics |
| Valley Health System | NJ | A | Stable | Standalone | Maintained | Credit quality consistent with existing rating |
| WellStar Health System Inc. | GA | A+ | Stable | System | Maintained | Credit quality consistent with existing rating |
This report does not constitute a rating action.
| Primary Credit Analyst: | Blake C Fundingsland, Englewood + 1 (303) 721 4703; blake.fundingsland@spglobal.com |
| Secondary Contacts: | Cynthia S Keller, Augusta + 1 (212) 438 2035; cynthia.keller@spglobal.com |
| Suzie R Desai, Chicago + 1 (312) 233 7046; suzie.desai@spglobal.com | |
| Research Assistant: | Elsa Berisha, New York |
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