Key Takeaways
- The revision reflects a trend of revenue recovery, ongoing balance sheet strength, and proactive management teams' focus on maintaining financial stability.
- While there are still meaningful headwinds in the sector, we believe the risk level has declined and is consistent with prior years when the outlook was stable.
- Federal funds through the CARES Act have provided significant support over the last 15 months to providers and helped limit the negative financial and downside risk from the pandemic.
- Currently around 85% of our rated health care organizations carry stable or positive outlooks, which further supports our decision.
S&P Global Ratings has revised its not-for-profit health care sector view to stable from negative where it was placed on March 25, 2020, and reiterated on Jan. 12 (see "Not-For-Profit Acute Care Sector Outlook Revised To Negative Reflecting Possible Prolonged COVID-19 Impact" and "Outlook For U.S. Not-For-Profit Acute Health Care: Navigating The Bumps While Getting Back On Track," both on RatingsDirect). A sector view does not apply to specific issuer or issue ratings but is a macro, forward-looking assessment of credit trends. Following this change, all sector views are stable in U.S. public finance except higher education (including community colleges and student housing).
For the remainder of 2021 and into 2022, we see a more balanced view of credit assuming continued COVID-19 vaccinations and no further meaningful virus surges, particularly on a national scale, although we expect that there could be regional variances depending on local vaccination rates. With improving vaccination rates since January and declining COVID-19 cases, we do not anticipate any additional mandated shutdowns of elective services, as occurred across the country beginning in March 2020.
Recovery Coupled With Federal And Economic Factors Support An Improved Credit View
Reduction of COVID-19 cases and vaccination rates support recovery
Supporting the stable view is our impression that the acute phase of the pandemic has eased as vaccination rates have increased and as hospitals and health systems have learned to manage COVID-19 patients alongside routine non-COVID-19 diagnosed patients, allowing volume and revenue to steadily return to or at near pre-pandemic levels, depending on the service line. While we recognize that there may be some longer-term or permanent shifts in treatment patterns, we believe management will continue to adapt and adjust accordingly.
Unemployment rates improve resulting in minimal payor mix deterioration in the near term
As unemployment rates continue to decline (see "U.S. Real-Time Data: Job And Mobility Trends Improve As Rising Prices Dampen Consumer Enthusiasm," June 11, 2021), additional volume may return, and we note that most providers did not experience a material negative shift in payor mix. We note that the overall economic outlook also has improved and that the American Rescue Plan (ARP) coupled with federal legislation from 2020 provide short-term support for continued health insurance coverage for qualifying individuals.
Extension of use of CARES Act funding and other federal programs may support hospitals for a longer time
Depending on timing of receipt of CARES Act money, some providers may be able to accrue for funds received until December 2022. In addition, those who chose to access funds from the Medicare COVID-19 Accelerated and Advance Payment program have a longer recoupment period than was originally outlined by CMS. Some providers have already chosen to pay those funds back in full, further highlighting the continued strengthening of the balance sheet and liquidity. Although most of the CARES Act funds have been allocated, we see continued support from the Federal government relative to the Affordable Care Act (ACA) and delays in Medicaid disproportionate share cuts through 2023. Additionally, the ACA appears to be safe for the near-term following the recent Supreme Court ruling in California v. Texas. States and individuals were further aided by the economic recovery and federal stimulus funds through the American Rescue Plan (ARP), which has contributed to stability in many state Medicaid programs.
Healthy balance sheets continue to support most providers
Finally, balance sheets have been a significant credit stabilizer across the sector and they remain sound for most providers. While many providers issued incremental debt over the last year to boost liquidity and take advantage of low interest rates, overall balance sheet strength improved with favorable market returns and flexible capital spending during the pandemic. We may see some balance sheet dilution over the next few years as capital spending ramps back up; however, we also believe management teams will take a balanced approach between capital spending and cash flow generation, and have incorporated these expectations into our stable sector view.
Near-Term Risks Remain, But May Be Offset By Agile Management And Above-Cited Factors
In addition to the key risks identified prior to the pandemic (see "U.S. Not-for-Profit Health Care 2020 Sector Outlook: A Precarious Balance As Evolution Continues," Jan. 9, 2020) we have identified potential reimbursement risks that may temper future earnings, primarily from Medicare and particularly as providers' payor mix continues to shift toward governmental payors due to aging demographics. These risks include the discontinuation of the enhanced Federal Medical Assistance Percentages payment for Medicaid and the COVID-19 20% reimbursement add-on from Medicare at the end of the public health emergency, as well as of the resumption of Medicare sequestration after Dec. 31, 2021. In addition, there remain staffing and salary pressures due to the pandemic and related burn out. While necessary staffing levels may be lower due to volume metrics that in some cases still lags pre-pandemic levels--particularly for inpatient admissions, observations, and emergency department visits--we believe growing salary and benefits expense, including increasing use of contract labor, is a major ongoing risk to operations and profitability which was present before the pandemic but certainly has been exacerbated over the last year. As a result, we expect margins will likely remain at lower levels given the broader industry headwinds and the more immediate pandemic-related issues. However, to the extent that the pandemic has enabled faster decision making and allowed management teams to pivot and identify new opportunities for expense base restructuring and revenue enhancement, we believe these risks are manageable within our view of the stable sector view.
The sector's longer-term headwinds on a variety of fronts that were present prior to the pandemic and remain today will continue to shape and affect acute health care, but we view the near-term direct and indirect pandemic-related risks, as outlined above, as having lessened.
This report does not constitute a rating action.
| Primary Credit Analyst: | Suzie R Desai, Chicago + 1 (312) 233 7046; suzie.desai@spglobal.com |
| Secondary Contacts: | Stephen Infranco, New York + 1 (212) 438 2025; stephen.infranco@spglobal.com |
| Cynthia S Keller, New York + 1 (212) 438 2035; cynthia.keller@spglobal.com | |
| Allison Bretz, Chicago + 1 (312) 233 7053; allison.bretz@spglobal.com | |
| Anne E Cosgrove, New York + 1 (212) 438 8202; anne.cosgrove@spglobal.com |
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