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Preliminary 2023 Medians For U.S. Acute Health Care Providers Indicate Continued Operating Pressures For Many


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U.S. Not-For-Profit Health Care Rating Actions, April 2024

Preliminary 2023 Medians For U.S. Acute Health Care Providers Indicate Continued Operating Pressures For Many

(Editor's Note: This article has been republished to correct a data point on our outlook actions for 2024.)


For U.S. acute health care providers, preliminary 2023 medians show only very modest, if any, improvement in performance-related metrics, and are still quite low compared with those in previous years. Balance sheets remain sound, although with mixed results, in particular a slight decrease in days' cash on hand. The sector has experienced easing in various labor pressures, thus stemming the steep drop in performance trends. However, certain entities remain particularly strained, while others are on a slow path to recovery and could be at a new baseline operationally, at least in the medium term. Given the fiscal year distribution of our audits, particularly for this preliminary median update, we expect the timing impact of improvement initiatives and recognition of 340B settlement payments for some organizations may cause some variability in the data as we receive the remaining audits for fiscal 2023.

S&P Global Ratings' sector view remains negative (see "U.S. Not-For-Profit Acute Health Care Providers 2024 Outlook: Historical Peak Of Negative Outlooks Signals Ongoing Challenges," published Dec. 8, 2023). A key reason is the high percentage of negative outlooks across rated organizations at the start of 2024. As of first-quarter 2024, the overall percentage of negative outlooks decreased slightly as some entities stabilized operations, leading us to affirm the rating and revise the outlook to stable, and others were downgraded, with a stable outlook. The majority of our ratings through the quarter were unchanged, but we're also seeing some volatility in rating actions every month, highlighting the varying industry and credit trends across the country and among individual hospitals and health care systems. (See "U.S. Not-For-Profit Health Care Rating Actions, March 2024," published April 15, 2024.)

Given the preliminary nature of this data, we've provided an abbreviated number of ratios and tables and expect to publish our complete set of median data and additional analysis in third-quarter 2024.

Preliminary 2023 Median Insights

Review of 2023 performance measurements shows very limited improvement.  The drop that occurred in the 2022 median performance-related metrics appears to have abated (see table 1), but 2023 preliminary performance-related medians remain low relative to historical medians and show only minimal improvement, if any, compared with 2022. This isn't surprising, given the easing in growth of labor costs and significant improvement initiatives by management teams. However, their efforts haven't been able to fully offset the significant expense growth in the past two years and some of the ongoing hurdles in the sector. Our acute care health systems' preliminary 2023 performance-related medians (except for maximum annual debt service coverage) improved slightly from 2022; however, stand-alone hospitals' performance medians generally decreased between 2022 and preliminary 2023 data (see tables 2a and 2b). This could be due to the fact that ratings on stand-alone providers incorporate more mid- and low-investment-grade categories, where there could be more problems to overcome. Performance-related metrics for lower rating categories fell more meaningfully between 2022 and preliminary 2023 data, but all rating categories experienced some weakening in these performance-related metrics (see table 3).

In addition, the 2023 audits were generally the first year that providers did not benefit from significant CARES Act funding, and while many did receive some Federal Emergency Management Agency funds, amounts were generally less substantial. Many providers are still trying to return to break-even in 2024, but this effort could likely extend into 2025, depending on the individual provider and pace of recovery.

S&P Global Ratings expects a new normal for performance targets will emerge, at least in the medium term, owing to embedded higher labor costs and ongoing inflationary pressures. While the growth in labor costs has eased, costs are still rising, and thus labor is still a pressure point as it takes time for updated commercial rates to be incorporated in revenues or expiring contracts to be renegotiated. In addition, management teams have successfully completed length-of-stay initiatives, which has added capacity to treat more patients with the same number of staff, resulting in improvement to operating performance for certain entities. Other areas of focus include rationalizing services, revenue cycle improvement, and other expense reduction initiatives.

Unrestricted reserves aren't strengthening meaningfully, but debt-related metrics are still in line.   Overall, unrestricted reserves have increased, as indicated by preliminary 2023 medians, and remain good, but have not kept pace with much higher expenses affected by labor costs and other inflationary pressures, resulting in a decrease in days' cash on hand. Nevertheless, preliminary 2023 debt-related metrics, such as unrestricted reserves to long-term debt and leverage (debt to capitalization), generally improved for health care systems but were mixed for stand-alone hospitals, with unrestricted reserves to long-term debt down, but leverage slightly better. Although the preliminary 2023 median analysis shows that these two ratios improved for providers in both the 'AA' and 'A' rating categories, ratios for lower-rated providers were mixed. Specifically, debt-related metrics for speculative-grade entities weakened (although the sample size is small).

The remainder of audits for 2023 could show some modest operating improvement.   The preliminary medians are skewed by a higher percentage of audits ending June or earlier, and so, we expect that as more of the second-half 2023 audits come in, we'll see some further, though likely limited, improvement to performance-related medians. We expect many providers incorporated the 340B Medicare settlement payment by year-end 2023 and they'll have had more time to record other benefits from higher reimbursement rates and throughput initiatives, as well as other operating improvements and expense savings, including better staffing trends. We believe that the balance-sheet medians likely won't exhibit meaningful differences from our preliminary indicators. In third-quarter 2024, we'll publish the complete list of 2023 medians with our more comprehensive set of audits on more than 400 rated hospitals and health care systems. Similar to 2023, we plan to provide quartile breakouts to review the range of medians.

Table 1

U.S. not-for-profit acute health care medians (stand-alone hospitals and health care systems)
--Fiscal year--
2023* 2022 2021 2020 2019 2018 2017 2016 2015 2014
Sample size 222 370 391 399 395 400 406 420 436 476
Financial performance
Net patient revenue ($000s) 1,365,335 1,121,231 996,903 900,920 922,974 746,999 691,280 656,518 605,869 494,464
Total operating revenue ($000s) 1,608,282 1,292,841 1,176,202 1,046,825 1,014,342 MNR MNR MNR MNR MNR
Total operating expenses ($000s) 1,577,020 1,311,555 1,118,932 MNR MNR MNR MNR MNR MNR MNR
Operating margin (%) 0.0 0.1 2.8 1.6 2.3 2.3 1.8 2.4 3.4 2.7
Operating EBIDA margin (%) 5.3 5.3 8.6 7.6 8.4 8.3 8.2 9.3 10.3 9.8
EBIDA margin (%) 7.0 6.9 11.7 9.5 10.0 10.3 10.2 10.5 12.2 12.0
Maximum annual debt service coverage (x) 3.1 3.3 5.4 3.9 3.9 4.0 3.9 3.9 4.3 4.1
Liquidity and financial flexibility
Unrestricted reserves ($000s) 800,108 741,915 819,247 680,185 553,019 493,742 447,705 409,896 382,573 314,414
Unrestricted days' cash on hand 196.5 209.5 250.0 232.9 210.2 216.7 215.3 210.3 217.0 214.0
Unrestricted reserves/total long-term debt (%) 178.2 172.7 211.7 192.5 181.5 168.6 169.2 171.8 161.0 156.9
Debt and liabilities
Long-term debt/capitalization (%) 29.5 30.2 27.8 29.9 29.2 30.4 30.8 32.0 32.1 31.8
*Preliminary medians from 2023 audits received as of April 18, 2024. MNR--Median not reported.

Table 2a

U.S. not-for-profit system abbreviated median analysis -- preliminary 2023 versus 2022
Fiscal year 2023* 2022
Sample size 93 156
Financial performance
Operating margin (%) 0.1 -0.4
Operating EBIDA margin (%) 5.2 4.9
EBIDA margin (%) 6.4 6.1
Maximum annual debt service coverage (x) 3.1 3.2
Liquidity and financial flexibility
Unrestricted days' cash on hand 194.2 206.9
Unrestricted reserves/total long-term debt (%) 180.3 169.5
Debt and liabilities
Debt to capitalization (%) 30.6 31.5
*Preliminary medians from 2023 audits received as of April 18, 2024.

Table 2b

U.S. not-for-profit stand-alone hospitals abbreviated median analysis -- preliminary 2023 versus 2022
Fiscal year 2023* 2022
Sample size 129 214
Financial performance
Operating margin (%) -0.3 0.4
Operating EBIDA margin (%) 5.5 6.0
EBIDA margin (%) 7.7 7.8
Maximum annual debt service coverage (x) 3.1 3.4
Liquidity and financial flexibility
Unrestricted days' cash on hand 203.6 215.3
Unrestricted reserves/total long-term debt (%) 172.9 175.5
Debt and liabilities
Debt to capitalization (%) 27.3 28.0
*Preliminary medians from 2023 audits received as of April 18, 2024.

Table 3

U.S. not-for-profit acute care health care abbreviated medians by rating category--preliminary 2023 versus 2022
AA A BBB Speculative-grade
Fiscal year 2023* 2022 2023* 2022 2023* 2022 2023* 2022
Sample size 62 101 101 164 43 73 16 32
Financial performance
Operating margin (%) 1.3 1.6 0.0 0.2 -2.3 -1.9 -6.0 -3.3
Operating EBIDA margin (%) 6.1 7.0 5.4 5.5 2.2 3.6 -0.2 2.9
EBIDA margin (%) 8.2 9.7 7.1 7.4 4.3 4.2 2.1 4.4
Maximum annual debt service coverage (x) 4.9 5.2 3.2 3.5 1.8 1.7 0.8 1.4
Liquidity and financial flexibility
Unrestricted days' cash on hand 253.8 279.3 192.7 209.5 124.5 134.2 65.9 76.3
Unrestricted reserves/total long-term debt (%) 273.6 270.9 167.9 164.2 123.1 128.2 54.8 56.9
Debt and liabilities
Long-term debt/capitalization (%) 21.7 22.4 30.5 30.8 35.1 37.2 56.6 54.4
*Preliminary medians from 2023 audits received as of April 18, 2024. Ratings as of March 31, 2024.

Fiscal year-end 2023 and early 2024 performance suggests that recovery remains a top focus for many.   Although the preliminary 2023 median data shows light operating-related metrics, individual hospital results are actually quite varied across 2023 and early 2024. Some continue to perform well, others have improved from 2022 but their metrics still aren't at levels in line with the rating, while still others face more meaningful performance difficulties and balance-sheet erosion. For those confronting performance stress or lighter-than-historical performance, we expect many will make incremental improvement as demand remains healthy, some of the renegotiated rates commence, agency use decreases with contract rates remaining lower than in 2022, and efficiency and other cost-cutting initiatives take effect. In recent years, many states have made enhancements to state Medicaid programs, including directed payment programs and new provider fee programs, which could also benefit organizations. However, in our view, these efforts might be partially offset by the steady growth in salaries and wages of an already high-cost workforce and by revenue pressures from increasing numbers of Medicare patients as well as payment denials from commercial payors, including Medicare Advantage plans. The recent Change Healthcare cyber attack could temporarily exacerbate those payor and revenue pressures for some organizations related to manual steps that might have been used. Other demographic and regulatory trends can be either credit strengths or weaknesses depending on the specific dynamics and will likely continue to play a role for many providers. Furthermore, inflationary trends, although down from earlier years, are still higher than before the pandemic.

In early 2024, capital spending and an uptick in new-money debt issuances returned following a period when many providers were on the sidelines for capital spending. We expect that this could temper balance sheets, especially for those still grappling with performance recovery. Although many debt issuances are still tax-exempt fixed-rate bonds, interest in variable-rate and variable-rate demand bonds using external bank support or self-liquidity and direct purchase debt has increased.

Rating and outlook actions in first-quarter 2024 were mixed, with another slow recovery year likely for many organizations.  For the majority of rated providers we reviewed in first-quarter 2024, the ratings are unchanged, consistent with actions in 2023. The rate and extent of performance recovery will be among the key factors in our surveillance for the remainder of 2024 and early 2025 along with our view of balance-sheet strength. Unfavorable to favorable outlooks reduced to 0.5 to 1, versus this ratio in calendar 2023 when it was 2.6 to 1; this could be a sign of some stability emerging after the recent turbulent operating conditions, but we will continue to monitor, as it is only one quarter.

In addition, downgrades outpaced upgrades by over 4x, with most of the downgrades occurring in March 2024. A common trend across all of the downgrades, most on entities already with a negative outlook, was continued operating losses that often were greater than we expected. This often occurred in tandem with erosion in the balance-sheet cushion, such that the balance sheet no longer aligned with the rating.

The trend of rating and outlook actions, along with our view of sector trends, will continue to inform our view on our sector outlook.

Related Research

Amy He contributed research to this report.

This report does not constitute a rating action.

Primary Credit Analysts:Suzie R Desai, Chicago + 1 (312) 233 7046;
Anne E Cosgrove, New York + 1 (212) 438 8202;
Secondary Contact:Stephen Infranco, New York + 1 (212) 438 2025;

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