Rating And Outlook Overview
Small hospitals, defined as having $150 million or less of total operating revenue, are a subset of stand-alone hospitals. This report reflects the medians of 20 small hospitals rated by S&P Global Ratings, compared with 26 hospitals reflected in last year's report. This decrease in the sample size is due partially to shifts in the portfolio and at times, the delay of release of audited information. The limited number of small hospitals creates unique challenges to drawing conclusions from median trends, particularly as this cohort of providers generally has higher volatility compared with other larger and more diversified health care issuers.
The ratings distribution of small hospitals has remained stable over the last year. Small hospitals experienced the same high labor and inflationary pressures felt across the sector, but it did not contribute to a meaningful shift in rating distribution. Although the ratings distribution variance between small hospitals and stand-alone hospitals in the 'A', 'BBB', and speculative-grade rating categories narrowed slightly, the ratings on small hospitals continue to have a greater percentage in lower rating categories. This is consistent with historical rating distribution trends given the inherent risks associated with small hospitals, including narrow revenue and service line diversity and limited population and economic growth characteristics.
Outlooks on small hospitals are slightly more favorable this year. Nearly 80% of small hospitals now maintain a stable outlook, compared with a year ago when it was just 68%, with one issuer excluded as it is on CreditWatch negative. Despite potential inherent volatility in a limited revenue base, small hospitals do not have an outsized distribution of negative outlooks. That said, due to the smaller size of this portfolio, the percentages can shift with fewer changes.
The portfolio of small hospitals is diverse. Although the number of issuers is limited, there are a variety of hospital types in this cohort, including rehabilitation and other specialty hospitals, tax supported hospital districts, and critical access hospitals. The portfolio is also geographically broad, representing 15 states. This diversity within such a small sample size also may contribute to some median volatility.
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Key Median Takeaways
General declines in profitability from 2021. Despite increases in net patient service revenue for 'A' and speculative-grade rated small hospitals, all three rating categories experienced a decline in operating margins in 2022. The decline was mainly due to increased labor and inflationary pressures and consistent with industry-wide trends, but margins remained stronger than 2020 except for the 'BBB' category, which was also the only category with a negative margin in 2022. Several small hospitals are designated critical access hospitals, resulting in cost-based reimbursement for Medicare, and often Medicaid, which likely offset some of the expense inflation. The trend in maximum annual debt service coverage was mixed, with both 'A' and 'BBB' rated hospitals experiencing a year-over-year decrease, while speculative-grade credits experienced a minor increase (but with a much smaller sample size than last year).
Mixed trends in liquidity and financial flexibility metrics. Unrestricted reserves and days' cash on hand followed divergent paths at different rating categories but remained stronger than stand-alone hospitals across all metrics, which has historically helped offset the inherent risk and volatility associated with modestly sized organizations with limited revenue and geographic diversity. The ratio of capital expenses to depreciation and amortization increased significantly in the 'BBB' and speculative-grade categories but remained materially unchanged for 'A' rated issuers. While this could be reflective of a need to spend on strategic capital after a period of restraint to preserve balance sheet flexibility, we also note that the sample size could be influencing this median ratio.
Lower debt levels at the investment-grade issuers, but higher at the speculative-grade ones. Small hospitals experienced varying shifts in long-term debt, which is likely reflective of changes in the sample size given there has been relative stability in the ratio of long-term debt to capitalization, a measure of leverage, and debt burden. This stability is further bolstered by higher interest rate costs, which could be limiting this group's ability and willingness to issue debt and support higher carrying charges. Rising discount rates contributed to the existing trend of improving defined-benefit pension plan funding status across categories.
Increased reliance on provider relief funding to sustain operations. Narrowing margins due to inflation and higher labor costs have resulted in small hospitals being increasingly reliant on provider relief funding as demonstrated by the decline in adjusted operating margin. 'A' and 'BBB' rated hospitals in particular were highly reliant on provider relief funding, as shown by a decrease of two percentage points in their operating margin when this support is excluded. Salaries and benefits relative to net patient service revenue, a metric that had historically been elevated for small hospitals due to their challenges in recruiting, is now consistent with that of stand-alone hospitals. In our view, the narrowing of this gap is attributed to industry-wide labor pressures that have made recruitment equally challenging for hospitals of various sizes.
Table 1
| U.S. not-for-profit small hospital medians by rating category--2022 versus 2021 versus 2020 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| A | BBB | Speculative grade | ||||||||||||||||||
| Fiscal year | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | |||||||||||
| Sample size | 7 | 7 | 6 | 7 | 8 | 11 | 6 | 11 | 15 | |||||||||||
| Financial performance | ||||||||||||||||||||
| Net patient revenue ($000s) | 123,641 | 113,095 | 99,723 | 67,367 | 88,200 | 74,833 | 90,705 | 85,594 | 68,468 | |||||||||||
| Total operating revenue ($000s) | 132,476 | 119,700 | 116,858 | 73,289 | 95,983 | 84,639 | 96,271 | 97,747 | 74,427 | |||||||||||
| Total operating expenses ($000s) | 124,217 | 112,558 | MNR | 72,449 | 92,271 | MNR | 92,481 | 99,361 | MNR | |||||||||||
| Operating income ($000s) | 4,686 | 6,411 | MNR | -381 | 3,581 | MNR | 2,234 | 5,260 | MNR | |||||||||||
| Operating margin (%) | 3.5 | 5.8 | -0.1 | -0.5 | 2.9 | 3.3 | 3.2 | 5.1 | 2.9 | |||||||||||
| Net nonoperating income ($000s) | 2,711 | 2,902 | MNR | 1,918 | 3,292 | MNR | 2,312 | 449 | MNR | |||||||||||
| Excess income ($000s) | 9,002 | 17,114 | MNR | 2,627 | 6,812 | MNR | 2,926 | 5,582 | MNR | |||||||||||
| Excess margin (%) | 9.1 | 7.9 | 4.7 | 2.3 | 6.3 | 3.7 | 5.1 | 5.9 | 5.5 | |||||||||||
| Operating EBIDA margin (%) | 10.4 | 11.8 | 8.7 | 6.2 | 10.6 | 8.3 | 11.7 | 13.3 | 12.1 | |||||||||||
| EBIDA margin (%) | 16.8 | 15.3 | 10.0 | 7.3 | 12.4 | 9.0 | 13.9 | 13.9 | 14.5 | |||||||||||
| Net available for debt service ($000s) | 17,076 | 18,999 | 12,418 | 10,490 | 11,536 | 9,570 | 7,466 | 12,951 | 10,472 | |||||||||||
| Maximum annual debt service ($000s) | 3,647 | 3,647 | MNR | 2,487 | 2,844 | MNR | 3,877 | 2,775 | MNR | |||||||||||
| Maximum annual debt service coverage (x) | 5.9 | 7.3 | 4.8 | 1.4 | 3.1 | 4.0 | 3.2 | 2.9 | 2.5 | |||||||||||
| Operating lease-adjusted coverage (x) | 5.5 | 5.5 | 4.0 | 1.3 | 3.0 | 3.6 | 2.9 | 2.9 | 2.3 | |||||||||||
| Liquidity and financial flexibility | ||||||||||||||||||||
| Unrestricted reserves ($000s) | 115,533 | 106,848 | 93,089 | 58,041 | 63,908 | 55,591 | 30,754 | 38,802 | 23,269 | |||||||||||
| Unrestricted days' cash on hand | 480.5 | 520.1 | 474.3 | 339.3 | 303.4 | 273.3 | 131.5 | 151.4 | 142.5 | |||||||||||
| Unrestricted reserves/total long-term debt (%) | 375.1 | 393.0 | 354.0 | 181.8 | 188.6 | 275.2 | 95.7 | 100.6 | 71.4 | |||||||||||
| Unrestricted reserves/contingent liabilities (%)* | 1,495.8 | 613.1 | 896.8 | 926.1 | 911.9 | 787.6 | 504.0 | 480.8 | 158.1 | |||||||||||
| Average age of plant (years) | 13.9 | 13.9 | 14.5 | 13.1 | 14.4 | 12.2 | 13.0 | 13.9 | 13.8 | |||||||||||
| Capital expenditures/depreciation and amortization (%) | 59.8 | 58.2 | 103.9 | 157.7 | 98.9 | 64.2 | 126.5 | 76.8 | 71.3 | |||||||||||
| Debt and liabilities | ||||||||||||||||||||
| Total long-term debt ($000s) | 43,682 | 46,362 | MNR | 25,326 | 39,301 | MNR | 39,535 | 27,889 | MNR | |||||||||||
| Long-term debt/capitalization (%) | 16.1 | 16.1 | 18.0 | 31.7 | 27.3 | 20.9 | 33.1 | 35.3 | 48.6 | |||||||||||
| Contingent liabilities ($000s)* | 10,953 | 33,780 | MNR | 29,335 | 15,569 | MNR | 10,275 | 2,265 | MNR | |||||||||||
| Contingent liabilities/total long-term debt (%)* | 25.1 | 54.4 | 61.7 | 19.6 | 39.2 | 46.1 | 28.2 | 22.1 | 18.8 | |||||||||||
| Debt burden (%) | 2.6 | 2.8 | 2.7 | 3.6 | 3.7 | 3.7 | 3.5 | 3.4 | 4.1 | |||||||||||
| Defined-benefit plan funded status (%)* | N/A | 101.7 | 89.0 | 119.3 | 105.3 | 99.0 | 83.6 | 62.3 | 96.2 | |||||||||||
| Miscellaneous | ||||||||||||||||||||
| Salaries & benefits/NPR (%) | 57.7 | 59.1 | 69.1 | 57.1 | 60.2 | 61.9 | 58.9 | 58.2 | 59.9 | |||||||||||
| Nonoperating revenue/total revenue (%) | 1.9 | 2.7 | 3.4 | 2.4 | 2.9 | 1.8 | 3.1 | 0.5 | 1.4 | |||||||||||
| Cushion ratio (x) | 40.1 | 39.9 | 42.0 | 27.6 | 23.6 | 27.1 | 9.5 | 8.7 | 5.4 | |||||||||||
| Days in accounts receivable | 54.0 | 61.6 | 49.9 | 49.8 | 50.6 | 50.7 | 59.7 | 43.0 | 45.7 | |||||||||||
| Cash flow/total liabilities (%) | 31.3 | 25.2 | 24.6 | 5.2 | 20.1 | 16.7 | 15.6 | 14.4 | 14.8 | |||||||||||
| Pension-adjusted long-term debt/capitalization (%)* | 16.1 | 16.1 | 18.0 | 31.7 | 27.5 | 20.3 | 33.7 | 35.3 | 48.1 | |||||||||||
| Adjusted operating margin (%)§ | 1.6 | 3.1 | MNR | -2.6 | 0.0 | MNR | 2.7 | 3.3 | 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 small hospital medians versus stand-alone medians by rating category--2022 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| A | BBB | Speculative grade | ||||||||||||
| Small | Stand-alone | Small | Stand-alone | Small | Stand-alone | |||||||||
| Sample size | 7 | 89 | 7 | 59 | 6 | 27 | ||||||||
| Financial performance | ||||||||||||||
| Net patient revenue ($000s) | 123,641 | 585,304 | 67,367 | 447,332 | 90,705 | 299,128 | ||||||||
| Total operating revenue ($000s) | 132,476 | 602,011 | 73,289 | 489,282 | 96,271 | 329,060 | ||||||||
| Total operating expenses ($000s) | 124,217 | 619,798 | 72,449 | 484,439 | 92,481 | 352,966 | ||||||||
| Operating income ($000s) | 4,686 | 962 | -381 | -6,284 | 2,234 | -9,354 | ||||||||
| Operating margin (%) | 3.5 | 0.4 | -0.5 | -1.7 | 3.2 | -1.1 | ||||||||
| Net nonoperating income ($000s) | 2,711 | 11,630 | 1,918 | 5,158 | 2,312 | 2,210 | ||||||||
| Excess income ($000s) | 9,002 | 9,955 | 2,627 | -1,592 | 2,926 | -3,758 | ||||||||
| Excess margin (%) | 9.1 | 2.7 | 2.3 | -0.3 | 5.1 | -0.7 | ||||||||
| Operating EBIDA margin (%) | 10.4 | 6.5 | 6.2 | 3.8 | 11.7 | 1.9 | ||||||||
| EBIDA margin (%) | 16.8 | 8.5 | 7.3 | 5.2 | 13.9 | 4.5 | ||||||||
| Net available for debt service ($000s) | 17,076 | 38,761 | 10,490 | 28,677 | 7,466 | 11,465 | ||||||||
| Maximum annual debt service ($000s) | 3,647 | 12,016 | 2,487 | 13,384 | 3,877 | 8,046 | ||||||||
| Maximum annual debt service coverage (x) | 5.9 | 3.9 | 1.4 | 1.8 | 3.2 | 1.4 | ||||||||
| Operating lease-adjusted coverage (x) | 5.5 | 3.1 | 1.3 | 1.6 | 2.9 | 1.3 | ||||||||
| Liquidity and financial flexibility | ||||||||||||||
| Unrestricted reserves ($000s) | 115,533 | 368,823 | 58,041 | 201,884 | 30,754 | 64,838 | ||||||||
| Unrestricted days' cash on hand | 480.5 | 255.0 | 339.3 | 148.6 | 131.5 | 89.2 | ||||||||
| Unrestricted reserves/total long-term debt (%) | 375.1 | 202.4 | 181.8 | 128.2 | 95.7 | 62.5 | ||||||||
| Unrestricted reserves/contingent liabilities (%)* | 1,495.8 | 909.8 | 926.1 | 769.0 | 504.0 | 813.1 | ||||||||
| Average age of plant (years) | 13.9 | 12.5 | 13.1 | 12.9 | 13.0 | 14.3 | ||||||||
| Capital expenditures/depreciation and amortization (%) | 59.8 | 119.0 | 157.7 | 106.8 | 126.5 | 114.7 | ||||||||
| Debt and liabilities | ||||||||||||||
| Total long-term debt ($000s) | 43,682 | 162,337 | 25,326 | 188,494 | 39,535 | 107,721 | ||||||||
| Long-term debt/capitalization (%) | 16.1 | 25.1 | 31.7 | 36.0 | 33.1 | 51.0 | ||||||||
| Contingent liabilities ($000s)* | 10,953 | 50,000 | 29,335 | 31,130 | 10,275 | 7,900 | ||||||||
| Contingent liabilities/total long-term debt (%)* | 25.1 | 24.4 | 19.6 | 14.8 | 28.2 | 6.8 | ||||||||
| Debt burden (%) | 2.6 | 2.4 | 3.6 | 2.7 | 3.5 | 3.0 | ||||||||
| Defined-benefit plan funded status (%)* | N/A | 91.8 | 119.3 | 96.9 | 83.6 | 83.6 | ||||||||
| Miscellaneous | ||||||||||||||
| Salaries & benefits/NPR (%) | 57.7 | 58.0 | 57.1 | 57.1 | 58.9 | 55.9 | ||||||||
| Nonoperating revenue/total revenue (%) | 1.9 | 2.1 | 2.4 | 1.2 | 3.1 | 0.6 | ||||||||
| Cushion ratio (x) | 40.1 | 27.6 | 27.6 | 15.8 | 9.5 | 7.3 | ||||||||
| Days in accounts receivable | 54.0 | 47.7 | 49.8 | 46.8 | 59.7 | 45.4 | ||||||||
| Cash flow/total liabilities (%) | 31.3 | 14.2 | 5.2 | 7.1 | 15.6 | 4.6 | ||||||||
| Pension-adjusted long-term debt/capitalization (%)* | 16.1 | 25.8 | 31.7 | 37.2 | 33.7 | 51.0 | ||||||||
| Adjusted operating margin (%)§ | 1.6 | -0.4 | -2.6 | -2.6 | 2.7 | -5.5 | ||||||||
| 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 Health Care Children’s Hospital 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 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: | Marc Arcas, Chicago +1 (312) 223 7069; marc.arcas@spglobal.com |
| Blake C Fundingsland, Englewood + 1 (303) 721 4703; blake.fundingsland@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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