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U.S. Not-For-Profit Acute Health Care 2020 Medians, Buoyed By Government Funding And Strong Investment Returns, Remain Largely Stable

The 2020 U.S. not-for-profit acute health care medians are remarkably stable considering the high level of turmoil last year as organizations managed through the COVID-19 pandemic (see table 1). This highlights the resiliency of management teams that continued to focus on financial performance and balance sheet protection while at the same time managing through an exceptionally challenging clinical environment.

While government support and surprisingly resilient investment markets contributed to overall ratio stability, there were pockets of instability and credit weakness within our portfolio. This, coupled with huge uncertainty from the pandemic, resulted in our decision to revise our view of the outlook for the not-for-profit sector negative from stable in March 2020 (see "Not-For-Profit Acute Care Sector Outlook Revised To Negative Reflecting Possible Prolonged COVID-19 Impact," published March 25, 2020, on RatingsDirect).

Year-To-Date Actions Point To Future Median Stability

As we look to the rest of 2021, there continues to be operating pressure points, including the recent surge in the delta variant across most of the country, especially given the uneven vaccination rates by state or region, potentially less stimulus aid through the remainder of the year, and higher labor expenses. However, on balance, we expect future median financial performance to be broadly stable as we view the likelihood of mandated shutdown of services similar to spring 2020 to be remote and believe management teams will continue to find opportunities to maintain performance, especially in light of some volume rebounds. Balance sheets and related metrics also continue to be consistent with recent year trends.

Our rating and outlook actions through the first six months of fiscal 2021 further support the recovery trend because although rating downgrades are outstripping upgrades, the absolute number of changes is much lower than in 2020. In addition, favorable outlook revisions midway through the year are running well above unfavorable outlook revisions. We consider a favorable outlook change to include revisions to positive from stable, to stable from negative, or to positive from negative, and vice versa for unfavorable outlook changes where the rating itself doesn't change. These trends as well as a growing number of organizations with stable outlooks all factored into our decision to revise our view of the sector back to stable from negative (see "U.S. Not-For-Profit Health Care Sector View Revised To Stable From Negative," June 23, 2021) and our view that next year's medians could remain fairly stable.

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Operating pressure relieved in part by stimulus funds and strong nonoperating revenue

After a rise in the 2019 medians, EBIDA dipped to 2018 levels and there was a material decline in operating and operating EBIDA margins. This trend was offset in part by strong nonoperating revenue that helped preserve stable debt service coverage and debt burden ratios (see chart 1). Operating margins typically exceed nonoperating margins, but in 2020 as in 2017 and 2013, the trend reversed, signaling increased reliance on nonoperating revenue. For the first time in a long while, net patient revenues declined 2.4% year over year--due primarily to the mandatory suspension of elective procedures, although total operating revenues increased 3.2% with the aid of CARES Act and other stimulus funds. As the year went on, many organizations benefitted from improving revenue yield due to shifting treatment patterns and higher acuity inpatient services, even though volumes had not fully recovered in all areas. While the investment markets may continue to strengthen, we believe that the more favorable outlook and rating trends also signal likely improvement in operating performance, absent any future pandemic surges that would result in a need to suspend nonemergent health care services.

We believe debt service coverage metrics also benefitted from the lower interest rate environment. Although many organizations issued additional debt to increase unrestricted reserves and maintain balance sheet flexibility due to the uncertain operating environment, interest rates were extremely low and the transactions often included refunding opportunities.

Salaries and benefits continue to be a long-standing expense pressure, but the trend was exacerbated during the pandemic with labor shortages, extremely high costs for temporary labor, increased staffing requirements, and difficulties covering employees who were sick or in quarantine. Salaries and benefits as a percent of net patient service revenue increased materially in 2020, and although part of the rise was due to a decline in net patient service revenue, we believe these expense categories will continue to be challenging.

Chart 1

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Balance sheet metrics unexpectedly improved during the pandemic

With robust investment returns, balance sheets generally strengthened in 2020 compared with 2019, with materially higher days' cash on hand, improved unrestricted reserves relative to debt, and slightly lower contingent liabilities (see chart 2). Debt as a percent of capitalization remained flat despite significant long-term debt issuance for liquidity and interest rate savings, largely due to the increase in capitalization fueled by unrestricted reserve growth. In addition, many organizations de-risked their debt portfolios by eliminating bank and variable rate debt given the favorable interest rate environment, which resulted in contingent liabilities accounting for a lower amount of the debt portfolio.

In addition to management teams proactively managing liquidity and debt, many organizations slowed capital spending resulting in weaker capital expenditures relative to depreciation expense and a slight uptick in average age of plant. While certain projects were unavoidably slowed because of the pandemic and social distancing requirements, many teams also slowed capital to preserve liquidity and to consider whether shifting priorities and operating strategies might change capital funded statuses.

Low interest rates continue to negatively influence defined-benefit plan pension funding statuses, which worsened for the second year in a row despite investment returns generally resulting in higher pension assets. Preliminary indications are that with a slight rise in discount rates, next year's median funding ratio may show incremental improvement.

Chart 2

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Fiscal year end matters

Although the ratios for the 399 health care organizations included in these medians show overall stability, results varied dramatically relative to when fiscal years ended (see table 2). Salaries and benefits increased throughout the year as net patient service revenue dipped and staffing became increasingly challenging. It is also clear that the second quarter from March through June was the weakest as organizations had to discontinue all nonemergent services, pay escalating prices for personal protective equipment, and in certain regions, treat extremely high acuity COVID-19 diagnosed patients without the benefit of significant government support. The CARES Act was passed in late March and although there was significant uncertainty around revenue recognition, many organizations were able to recognize some additional revenue from stimulus funds and volume that began to return as the virus subsided. With increased government support and robust investment returns, virtually every ratio improved during the third quarter. The fourth quarter was generally the strongest quarter after the pandemic began as organizations had more time to recover from the mandated shutdowns in March and were able to recognize more government funding, although some of those benefits may have been erased for those markets that experienced a heavy winter virus surge. While organizations with fiscal year ends before April showed the healthiest ratios, the sample size is limited and the size of the organizations appear to be much smaller overall, which often means healthier financial performance is required to offset risks associated with limited size and diversity.

Outlook and rating trends in 2020 were unfavorable overall

After being largely stable from 2010 through 2016, 2020 upgrades (excluding those solely related to a criteria change in 2018) continued a four-year declining trend with just eight upgrades in 2020 (see chart 3). Of these eight upgrades, five occurred during the first quarter largely before the pandemic affected credit and the remainder were due to the credit benefits of mergers. Downgrades increased in 2020, although credit weakness and uncertainty were more often reflected in unfavorable outlook revisions (see chart 4).

In 2020, unfavorable outlook revisions (primarily to negative from stable) spiked to 73--compared with an annual 10-year average of 40 from 2011 through 2020--and exceeded levels experienced during the Great Recession in 2008 and 2009. This in part reflected our April 2020 multi-credit action that unfavorably revised outlooks on 42 organizations that were mostly speculative grade or had limited unrestricted reserves. There were also fewer favorable outlook revisions in 2020 compared with 2019 although the actual number was not materially out of line with other years, in part because many of the outlooks were revised from negative to stable and because most of the favorable revisions occurred either in early winter prior to the pandemic or toward the end of 2020 after CARES Act funds began to flow and financially support hospitals.

With outlook revisions on about one-quarter of our rated portfolio, the outlook distribution in 2020 shifted slightly to fewer stable and positive outlooks and more negative outlooks (see chart 5). Nevertheless, most of our outlooks remained stable and we affirmed a majority of our ratings in 2020 leaving the rating distribution with limited changes (see chart 6). The relationship between ratings on stand-alone hospitals and health systems also remained fairly stable. The curve for stand-alone ratings is generally flatter with fewer 'AA' category ratings and more speculative grade ratings compared with the health systems that have most ratings concentrated in the 'AA' and 'A' categories (see chart 7). This is because the financial threshold measurements for health systems are more forgiving reflecting additional core strengths that can reduce credit volatility including financial dispersion, geographic diversity, size, and scale.

Chart 3

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Chart 4

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Chart 5

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Chart 6

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Chart 7

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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 credits 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 medians, unrestricted reserves exclude Medicare advance payments and pandemic-related short term borrowings. All recognized CARES Act funding and other pandemic related relief is included in total operating revenue.

Table 1

U.S. Not-For-Profit Acute Health Care Medians (Stand-Alone Hospitals And Health Care Systems)
Fiscal year 2020 2019 2018 2017 2016 2015 2014 2013
Sample size 399 395 400 406 420 436 476 501
Statement of operations
Net patient revenue (NPR; $000) 900,920 922,974 746,999 691,280 656,518 605,869 494,464 474,871
Total operating revenue ($000) 1,046,825 1,014,342 MNR MNR MNR MNR MNR MNR
Salaries & benefits/NPR (%) 60.2 56.7 56.8 57.0 56.1 55.2 56.2 56.3
Maximum annual debt service coverage (x) 3.9 3.9 4.0 3.9 3.9 4.3 4.1 3.6
Operating lease-adjusted coverage (x)* 3.1 3.2 3.1 3.1 3.1 3.4 3.3 3.1
Debt burden (%) 2.4 2.4 2.5 2.5 2.6 2.7 2.9 3.0
EBIDA ($000) 90,167 100,739 90,601 74,766 72,965 77,957 64,463 55,900
Nonoperating revenue/total revenue (%) 1.8 1.9 2.0 2.0 1.3 2.0 2.4 2.2
EBIDA margin (%) 9.5 10.0 10.3 10.2 10.5 12.2 12.0 11.1
Operating EBIDA margin (%) 7.6 8.4 8.3 8.2 9.3 10.3 9.8 9.2
Operating margin (%) 1.6 2.3 2.3 1.8 2.4 3.4 2.7 2.1
Excess margin (%) 3.4 4.1 4.1 4.0 4.1 5.3 5.0 4.1
Capital expenditures/depr. & amort. exp. (%) 112.9 119.3 122.8 122.5 120.2 112.6 110.9 118.4
Balance sheet
Average age of plant (years) 11.8 11.5 11.3 11.3 11.0 10.8 10.8 10.7
Cushion ratio (x) 24.8 23.0 21.9 21.2 20.7 19.7 18.6 17.1
Days' cash on hand 232.9 210.2 216.7 215.3 210.3 217.0 214.0 197.6
Days in accounts receivable 45.1 47.6 46.8 47.8 47.4 48.3 49.3 49.2
Cash flow/total liabilities (%) 11.6 15.5 15.7 15.5 15.1 17.2 17.4 16.0
Unrestricted reserves ($000) 680,185 553,019 493,742 447,705 409,896 382,573 314,414 273,634
Unrestricted reserves/long-term debt (%) 192.5 181.5 168.6 169.2 171.8 161.0 156.9 143.5
Unrestricted reserves/contingent liabilities (%)* 775.4 650.1 588.7 544.4 507.0 460.5 448.8 MNR
Contingent liabilities/long-term debt (%)* 26.6 28.7 31.8 33.7 34.7 35.9 35.5 MNR
Long-term debt/capitalization (%) 29.9 29.2 30.4 30.8 32.0 32.1 31.8 33.6
DB pension funded status (%)* 80.7 81.8 84.1 81.7 74.4 77.6 81.0 81.3
Pension-adjusted long-term debt/capitalization (%)* 32.1 31.7 31.7 33.3 35.1 35.8 34.7 35.7
MNR--median not reported. *These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities.

Table 2

U.S. Not-For-Profit Acute Health Care Select 2020 Medians By Fiscal Year End (Stand-Alone Hospitals And Health Care Systems)
Fiscal year end January through March 2020 April through June 2020 July through September 2020 October through December 2020 All fiscal year ends 2020
Sample size 11 136 107 145 399
Statement of operations
Net patient revenue (NPR; $000) 604,320 924,679 901,935 923,451 900,920
Total operating revenue ($000) 630,412 1,044,790 998,490 1,174,091 1,046,825
Salaries & benefits/NPR (%) 57.0 58.7 61.4 61.2 60.2
Maximum annual debt service coverage (x) 4.7 3.3 4.2 3.9 3.9
Debt burden (%) 2.2 2.4 2.3 2.5 2.4
Operating margin (%) 2.9 0.7 1.4 2.2 1.6
Excess margin (%) 4.7 2.6 3.3 4.4 3.4
Capital expenditures/depr. & amort. exp. (%) 98.69 118.29 111.85 113.42 112.9
Balance sheet
Average age of plant (years) 13.0 12.0 11.7 11.7 11.8
Days' cash on hand 241.0 215.4 228.1 257.1 232.9
Unrestricted reserves ($000) 348,996 655,389 693,315 748,018 680,185
Unrestricted reserves/long-term debt (%) 212.9 173.9 211.5 184.7 192.5
Contingent liabilities/long-term debt (%)* 27.8 24.8 31.1 25.8 26.6
Long-term debt/capitalization (%) 26.4 32.1 27.5 30.3 29.9
DB pension funded status (%)* 76.6 80.2 76.6 83.3 80.7
*These two ratios are only for organizations that have defined-benefit (DB) pension plans or contingent liabilities.

Related Research

Glossary of our ratios
Monthly rating changes

This report does not constitute a rating action.

Primary Credit Analysts:Cynthia S Keller, Augusta + 1 (212) 438 2035;
cynthia.keller@spglobal.com
Suzie R Desai, Chicago (1) 312-233-7046;
suzie.desai@spglobal.com
Chloe A Pickett, Centennial (1) 303-721-4122;
Chloe.Pickett@spglobal.com
Secondary Contacts:Allison Bretz, Chicago +1 (303) 721 4119;
allison.bretz@spglobal.com
Anne E Cosgrove, New York + 1 (212) 438 8202;
anne.cosgrove@spglobal.com
Stephen Infranco, New York + 1 (212) 438 2025;
stephen.infranco@spglobal.com
Research Contributors:Adwait Chandsarkar, CRISIL Global Analytical Center, an S&P affiliate, Mumbai
Karan Shah, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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