Rating And Outlook Overview
Number of rated children's hospitals remains stable. The number of children's hospitals rated by S&P Global Ratings has remained steady year-over-year, rising by one in 2022, up to 22 providers. Portfolio movement is limited, as mergers and acquisitions are rare in the segment and financials have historically been stable. All rated children's hospitals are considered stand-alone hospitals per our criteria, with the exception of Houston-based Texas Children's Hospital, which is considered a system.
Ratings distribution skewed toward the 'AA' category. Children's hospitals remain skewed toward higher rating categories relative to the broader group of not-for-profit acute care providers, with 91% in the 'AA' or 'A' category and none considered speculative grade, reflecting the cohort's generally stronger credit quality. The higher ratings are supported by the hospitals' institutional strengths and positions in the market, as often they are the only provider of tertiary and quaternary pediatric services and are able to secure additional state supplemental funds to help offset children's hospitals typically high Medicaid payor mix. The hospitals' generally healthy financial profiles, albeit with support from supplemental funds, and sound balance sheets also support their higher ratings and help offset higher Medicaid exposure.
Outlooks remain predominantly stable. The outlooks for almost all ratings in this group are stable, with only one issuer having a positive outlook and one with a negative outlook; both are outside the 'AA' category. This speaks to the generally higher ratings and overall credit stability of the segment, with children's hospitals better able to absorb the industry-wide expense pressures that have negatively affected the sector at large, while weathering a great deal of market volatility to their robust investment portfolios.
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Key Median Takeaways
Continued resiliency of credit metrics. In 2022, children's hospitals continued to exhibit financial profiles that were stronger than stand-alone hospital peers, despite some tapering in key measures from 2021 levels. Notably, adjusted operating margin for 'AA' category children's hospitals actually improved from the prior year, indicating a strong recovery in underlying earnings for these providers. In addition, though there was a decline in key performance measures in both rating categories, 2022 results generally remained above those of 2020 at the pandemic's onset. Though pediatric providers have endured the same sector pressures on expenses and labor, we believe sustained high-acuity demand and favorable commercial payor relationships have helped mitigate this headwind.
Unrestricted reserves taper with market volatility but remain exceptional in 'AA' category. Both categories of children's hospitals had erosion in key unrestricted reserve metrics from 2021, likely due to investment market volatility and healthy capital spending, given operating earnings remained comparatively sound. That said, days' cash on hand for the 'AA' category remained above 400 days and helps support the stable outlooks in the entirety of this group. In addition, most children's hospitals continued to generate healthy philanthropy, which has historically helped to support unrestricted reserves.
Some distinction between 'AA' and 'A' category balance sheets, generally stable debt profiles. There remains a notable difference across the balance sheets of 'AA' category children's hospitals and those in the 'A' category. Children's hospitals in the 'A' category, albeit a small sample that lends to some volatility in medians year-over-year, carry higher days' cash on hand than stand-alone hospitals, but with debt related measures more comparable with those of stand-alone hospitals. Key debt measures including leverage and debt burden, particularly for the 'A' category issuers, show less variation to stand-alone hospitals, indicating credit differentiators for children's hospitals are primarily related to factors within enterprise profiles, profitability, and unrestricted reserves. Further, debt profiles of both the 'AA' and 'A' categories remained stable when compared with the prior year. The median funded status of defined-benefit pensions plans in the 'AA' category were above 100%; no children's hospital medians included in the 'A' category had a defined-benefit pension plan.
Certain ratios highlight some of the unique characteristics of children's hospitals. We continue to observe children's hospitals having materially higher days in accounts receivable when compared with their stand-alone hospital peers. We believe this is reflective of the higher Medicaid payor mix and state supplemental programs pediatric providers carry. Despite this, adjusted operating margins in 2022 remained favorable relative to stand-alone hospitals for both the 'AA' and 'A' categories.
Table 1
| U.S. not-for-profit children’s hospital medians by rating category--2022 versus 2021 versus 2020 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| AA | A | |||||||||||||
| Fiscal year | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | ||||||||
| Sample size | 15 | 14 | 12 | 5 | 5 | 6 | ||||||||
| Financial performance | ||||||||||||||
| Net patient revenue ($000s) | 1,619,380 | 1,238,433 | 1,151,196 | 1,255,390 | 1,172,954 | 1,136,653 | ||||||||
| Total operating revenue ($000s) | 1,893,993 | 1,639,920 | 1,613,635 | 1,305,116 | 1,235,474 | 1,285,490 | ||||||||
| Total operating expenses ($000s) | 1,705,999 | 1,528,660 | MNR | 1,198,954 | 1,090,015 | MNR | ||||||||
| Operating income ($000s) | 71,440 | 68,820 | MNR | 38,605 | 82,010 | MNR | ||||||||
| Operating margin (%) | 5.1 | 6.1 | 4.9 | 4.2 | 5.2 | 1.9 | ||||||||
| Net nonoperating income ($000s) | 58,218 | 91,880 | MNR | 11,630 | 23,872 | MNR | ||||||||
| Excess income ($000s) | 139,305 | 173,653 | MNR | 50,235 | 104,052 | MNR | ||||||||
| Excess margin (%) | 6.8 | 10.3 | 7.1 | 5.9 | 9.4 | 3.4 | ||||||||
| Operating EBIDA margin (%) | 12.1 | 11.7 | 11.6 | 9.6 | 12.0 | 9.5 | ||||||||
| EBIDA margin (%) | 13.7 | 16.1 | 13.4 | 12.4 | 15.9 | 10.4 | ||||||||
| Net available for debt service ($000s) | 322,857 | 263,098 | 174,185 | 112,266 | 245,375 | 168,273 | ||||||||
| Maximum annual debt service ($000s) | 26,025 | 24,509 | MNR | 38,641 | 34,726 | MNR | ||||||||
| Maximum annual debt service coverage (x) | 6.7 | 9.5 | 6.4 | 4.7 | 5.4 | 4.1 | ||||||||
| Operating lease-adjusted coverage (x) | 5.3 | 7.3 | 4.5 | 3.9 | 4.1 | 3.0 | ||||||||
| Liquidity and financial flexibility | ||||||||||||||
| Unrestricted reserves ($000s) | 1,552,570 | 1,537,475 | 1,417,895 | 1,164,932 | 1,184,698 | 940,599 | ||||||||
| Unrestricted days' cash on hand | 417.2 | 484.4 | 469.6 | 301.5 | 360.7 | 305.8 | ||||||||
| Unrestricted reserves/total long-term debt (%) | 366.7 | 423.6 | 393.7 | 160.6 | 159.4 | 171.8 | ||||||||
| Unrestricted reserves/contingent liabilities (%)* | 1,786.3 | 2,164.5 | 1,727.3 | 855.0 | 719.1 | 768.3 | ||||||||
| Average age of plant (years) | 11.4 | 10.3 | 10.1 | 10.7 | 11.5 | 10.4 | ||||||||
| Capital expenditures/depreciation and amortization (%) | 184.6 | 137.7 | 134.1 | 134.3 | 76.1 | 100.2 | ||||||||
| Debt and liabilities | ||||||||||||||
| Total long-term debt ($000s) | 459,718 | 405,212 | MNR | 689,084 | 669,669 | MNR | ||||||||
| Long-term debt/capitalization (%) | 16.7 | 16.0 | 16.7 | 26.8 | 26.8 | 29.1 | ||||||||
| Contingent liabilities ($000s)* | 80,000 | 130,050 | MNR | 128,580 | 166,705 | MNR | ||||||||
| Contingent liabilities/total long-term debt (%)* | 27.1 | 17.5 | 22.8 | 16.8 | 21.9 | 19.4 | ||||||||
| Debt burden (%) | 1.8 | 1.9 | 2.3 | 2.6 | 3.1 | 2.9 | ||||||||
| Defined-benefit plan funded status (%)* | 102.1 | 99.9 | 86.5 | N/A | 100.0 | 99.3 | ||||||||
| Miscellaneous | ||||||||||||||
| Salaries & benefits/NPR (%) | 59.8 | 63.5 | 67.0 | 55.9 | 53.5 | 58.4 | ||||||||
| Nonoperating revenue/total revenue (%) | 2.4 | 5.4 | 3.4 | 3.3 | 3.9 | 2.0 | ||||||||
| Cushion ratio (x) | 60.3 | 67.5 | 51.9 | 25.8 | 27.4 | 26.9 | ||||||||
| Days in accounts receivable | 60.1 | 63.5 | 54.0 | 58.5 | 57.9 | 50.2 | ||||||||
| Cash flow/total liabilities (%) | 20.8 | 28.8 | 20.8 | 18.0 | 16.0 | 12.7 | ||||||||
| Pension-adjusted long-term debt/capitalization (%)* | 16.9 | 15.9 | 16.5 | 26.9 | 26.8 | 29.0 | ||||||||
| Adjusted operating margin (%)§ | 4.7 | 2.8 | MNR | 3.8 | 4.8 | MNR | ||||||||
| MNR--median not reported. N/A--not applicable. *These ratios are only for organizations that have defined-benefit (DB) pension plans or contingent liabilities. §Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to pandemic related relief funds recognized, but could comprise other nonrecurring items. | ||||||||||||||
Table 2
| U.S. not-for-profit children’s hospital medians versus stand-alone medians by rating category--2022 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| AA | A | |||||||||
| Children's hospitals | Stand-alone hospitals | Children's hospitals | Stand-alone hospitals | |||||||
| Sample size | 15 | 39 | 5 | 89 | ||||||
| Financial performance | ||||||||||
| Net patient revenue ($000s) | 1,619,380 | 1,383,205 | 1,255,390 | 585,304 | ||||||
| Total operating revenue ($000s) | 1,893,993 | 1,708,431 | 1,305,116 | 602,011 | ||||||
| Total operating expenses ($000s) | 1,705,999 | 1,659,360 | 1,198,954 | 619,798 | ||||||
| Operating income ($000s) | 71,440 | 50,694 | 38,605 | 962 | ||||||
| Operating margin (%) | 5.1 | 4.3 | 4.2 | 0.4 | ||||||
| Net nonoperating income ($000s) | 58,218 | 37,255 | 11,630 | 11,630 | ||||||
| Excess income ($000s) | 139,305 | 104,718 | 50,235 | 9,955 | ||||||
| Excess margin (%) | 6.8 | 6.8 | 5.9 | 2.7 | ||||||
| Operating EBIDA margin (%) | 12.1 | 9.8 | 9.6 | 6.5 | ||||||
| EBIDA margin (%) | 13.7 | 13.0 | 12.4 | 8.5 | ||||||
| Net available for debt service ($000s) | 322,857 | 165,289 | 112,266 | 38,761 | ||||||
| Maximum annual debt service ($000s) | 26,025 | 26,182 | 38,641 | 12,016 | ||||||
| Maximum annual debt service coverage (x) | 6.7 | 6.5 | 4.7 | 3.9 | ||||||
| Operating lease-adjusted coverage (x) | 5.3 | 5.3 | 3.9 | 3.1 | ||||||
| Liquidity and financial flexibility | ||||||||||
| Unrestricted reserves ($000s) | 1,552,570 | 1,277,939 | 1,164,932 | 372,986 | ||||||
| Unrestricted days' cash on hand | 417.2 | 335.5 | 301.5 | 257.9 | ||||||
| Unrestricted reserves/total long-term debt (%) | 366.7 | 300.2 | 160.6 | 202.4 | ||||||
| Unrestricted reserves/contingent liabilities (%)* | 1,786.3 | 1,478.2 | 855.0 | 909.8 | ||||||
| Average age of plant (years) | 11.4 | 11.2 | 10.7 | 12.5 | ||||||
| Capital expenditures/depreciation and amortization (%) | 184.6 | 138.2 | 134.3 | 119.0 | ||||||
| Debt and liabilities | ||||||||||
| Total long-term debt ($000s) | 459,718 | 373,278 | 689,084 | 162,337 | ||||||
| Long-term debt/capitalization (%) | 16.7 | 19.7 | 26.8 | 25.1 | ||||||
| Contingent liabilities ($000s)* | 80,000 | 104,900 | 128,580 | 50,000 | ||||||
| Contingent liabilities/total long-term debt (%)* | 27.1 | 19.3 | 16.8 | 24.4 | ||||||
| Debt burden (%) | 1.8 | 1.9 | 2.6 | 2.4 | ||||||
| Defined-benefit plan funded status (%)* | 102.1 | 98.6 | N/A | 91.8 | ||||||
| Miscellaneous | ||||||||||
| Salaries & benefits/NPR (%) | 59.8 | 59.0 | 55.9 | 58.0 | ||||||
| Nonoperating revenue/total revenue (%) | 2.4 | 2.4 | 3.3 | 2.1 | ||||||
| Cushion ratio (x) | 60.3 | 44.9 | 25.8 | 27.6 | ||||||
| Days in accounts receivable | 60.1 | 52.6 | 58.5 | 47.7 | ||||||
| Cash flow/total liabilities (%) | 20.8 | 21.0 | 18.0 | 14.2 | ||||||
| Pension-adjusted long-term debt/capitalization (%)* | 16.9 | 18.9 | 26.9 | 25.8 | ||||||
| Adjusted operating margin (%)§ | 4.7 | 2.7 | 3.8 | -0.4 | ||||||
| MNR--median not reported. N/A--not applicable. *These ratios are only for organizations that have defined-benefit (DB) pension plans or contingent liabilities. §Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to pandemic related relief funds recognized, but could comprise other nonrecurring items. | ||||||||||
Ratio Analysis
We view ratio analysis as an important tool in our assessment of the credit quality of not-for-profit health care organizations in addition to other key considerations including our analysis of enterprise profile factors and forward-looking views relative to both the business and financial positions. The median ratios offer a snapshot of the financial profile and help in the comparison of issuers across rating categories. Tracking median ratios over time also presents a clearer understanding of industrywide trends and provides a tool to better assess the sector's future credit quality.
The financial statements used for medians and in our analysis include both obligated and nonobligated group members. For the 2020, 2021, and 2022 medians, unrestricted reserves exclude Medicare advance payments. All recognized CARES Act funding and other pandemic related relief is included in total operating revenue.
Related Research
- U.S. Not-For-Profit Acute Health Care 2022 Medians: Historically Low Metrics Signify A Long Road To A New Normal, Aug. 7, 2023
- U.S. Not-For-Profit Health Care Stand-Alone Hospital Median Financial Ratios--2022, Aug. 7, 2023
- U.S. Not-For-Profit Health Care System Median Financial Ratios--2022, Aug. 7, 2023
- U.S. Not-For-Profit Acute Health Care Speculative-Grade Median Financial Ratios--2022, Aug. 7, 2023
- U.S. Not-For-Profit Health Care Small Stand-Alone Hospital Median Financial Ratios--2022, Aug. 7, 2023
- U.S. Not-For-Profit Health Care Ratings And Outlooks As of June 30, 2023, July 24, 2023
- U.S. Not-For-Profit Health Care Midyear Update 2023: Out Of Intensive Care And On The Path To Recovery Amid Ongoing Operating Challenges, June 28, 2023
- U.S. Not-For-Profit Acute Health Care Rating Actions, 2022 Year-End Review, Feb. 28, 2023
- Outlook For U.S. Not-For-Profit Acute Health Care: A Long Road Ahead, Dec. 1, 2022
Glossary of our ratios
Glossary: Not-For-Profit Health Care Organization Ratios, March 19, 2018
Quarterly rating actions
- U.S. Not-For-Profit Health Care Rating Actions, June 2022 And Second-Quarter 2023, July 24, 2023
- U.S. Not-For-Profit Health Care Rating Actions, March And First-Quarter 2023, April 25, 2023
This report does not constitute a rating action.
| Primary Credit Analysts: | Concy Richards, Chicago (464) 204-0272; concy.richards@spglobal.com |
| Patrick Zagar, Dallas + 1 (214) 765 5883; patrick.zagar@spglobal.com | |
| Secondary Contacts: | Stephen Infranco, New York + 1 (212) 438 2025; stephen.infranco@spglobal.com |
| Suzie R Desai, Chicago + 1 (312) 233 7046; suzie.desai@spglobal.com | |
| Research Contributors: | Shrutika Joshi, Pune; shrutika.joshi@spglobal.com |
| Akul Patel, Pune; akul.patel@spglobal.com | |
| Kunal Salunke, Mumbai; kunal.salunke@spglobal.com |
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