S&P Global Ratings' not-for-profit health care rating actions for the third quarter of 2021 were equal with seven downgrades and seven upgrades. There were also 14 favorable outlook revisions, mostly to stable from negative, and three unfavorable outlook revisions all to negative from stable. In addition, 78 of our 109 rating actions were affirmations, which further supports our stable sector outlook.

The year-to-date total of 46 favorable outlook revisions is significantly higher than the 13 unfavorable outlook revisions. We believe this trend reflects the strength of the sector as operations continue to normalize, although the sector still has ample headwinds related to staffing shortages, uneven volume recovery, varying vaccination and hospitalization rates, and lower pandemic related government stimulus. Year to date rating downgrades (12) outpace upgrades (eight), reflecting the more negative skew of rating actions in the earlier quarters; for instance, there were no upgrades in the first quarter of 2021 and only one upgrade in the second quarter.

September 2021 Had More Downgrades Than Upgrades, But Outlook Revisions Were Firmly Positive

In September, there were limited rating actions with three downgrades and two upgrades (see table 1). However, we took far more outlook actions with September and third quarter favorable outlook revisions exceeding unfavorable outlook revisions and matching cumulative trends in both the first and second quarters. In September, we affirmed 32 ratings without revising the outlooks, and we assigned new ratings to Magnolia Regional Health Center (MS), SouthEast Alaska Regional Health Consortium (AK), and Adventist HealthCare (MD). Rating actions include:

• Three downgrades (two downgrades of standalone hospitals and one downgrade of a health system);
• Two upgrades (one upgrade from the speculative-grade category to investment-grade category and one upgrade from the 'BBB' rating category to the 'A' rating category);
• Seven favorable outlook revisions (five outlook revisions to stable from negative and two outlook revisions to positive from stable with all but one of the revisions on stand-alone hospitals); and
• One unfavorable outlook revision (to negative from stable).

In September, we rated 21 new bond issues.

Non-stable outlooks indicate a one-in-three likelihood of a future rating change during the outlook period. We consider a favorable outlook change to include revisions to positive from stable, to stable from negative, or less commonly, to positive from negative, and vice versa for unfavorable outlook changes where the rating itself doesn't change.

Table 1

Third-Quarter Rating Actions

In the third quarter of 2021, we lowered seven ratings and also raised seven ratings (see chart 1). We also affirmed 17 ratings while revising their outlooks favorably (14) and unfavorably (3). Furthermore, we initially assigned eight new ratings during the third quarter to the following issuers:

• Tucson Medical Center (AZ)
• Ochsner LSU Health System of Northern Louisiana (LA)
• Antelope Valley Hospital (CA)
• AtlantiCare Health System (NJ)
• St. Lukes Hospital of Duluth (MN)
• Magnolia Regional Health Center (MS)
• SouthEast Alaska Regional Health Consortium (AK)
• Adventist HealthCare (MD)

Chart 1

During the third quarter of 2021, upgrades were driven by a fairly even mix of balance sheet and operational performance factors, whereas the downgrades were more skewed toward operational performance weakness (see chart 2). However, we also downgraded a rating in the third quarter due in part to an environmental, social, and governance (ESG) risk factor related to an issuer's location in southwestern Louisiana.

We believe the factors driving the rating changes reflect that while balance sheet metrics have served as a stabilizing factor for many issuers, operating performance has been dissimilar across our portfolio of credit ratings, as certain issuers have been more affected by industry cost pressures and have struggled to find footing during this leg of the pandemic. We continue to believe that as the trend in patient behaviors continues toward a new normalization, enterprise profiles including market share information will further come into focus as the utilization landscape develops.

The most-cited factors driving both favorable and unfavorable outlook revisions during the third quarter were around operational performance and balance-sheet changes, consistent with the prior quarter (see chart 3).

Chart 2

Chart 3

Rated new sale volume during the third quarter of nearly $9 billion was greater than the second and first quarter rated new sale volume of $8 billion and $6 billion, respectively. New sale issuance during the third quarter was the highest in the southeast region of the United States (see chart 4), and over $6 billion in total new sale issuance was from health systems. We expect that new sale activity will continue to be elevated at least through the current month as providers take advantage of low interest rates.

Chart 4

Credit Quality Expectations For The Remainder Of The Year

We have a stable sector outlook on the not-for-profit acute care sector. Our stable sector outlook is supported by broad balance sheet strength of providers due to the provider relief funds and favorable investment returns since market lows at the start of the pandemic in spring 2020. This balance sheet strength should continue to provide a rating cushion to manage through some mixed operational results related to short-term revenue interruptions, potential market volatility, the phase out of stimulus funding, and expense pressures. In particular we believe staffing will be a persistent challenge due to heightened turnover and salary requirements, burnout, retirements, and a generally tight labor market. The sector may also be affected by surges of the coronavirus, interrupting management plans and in some cases crowding out more profitable services, although this risk is dependent on local market conditions including vaccination rates.

Related Research

• U.S. Not-For-Profit Health Care Sector View Revised To Stable From Negative, published June 23, 2021
• U.S. Not-For-Profit Health Care Outstanding Ratings And Outlooks As of June 30, 2021, published July 29, 2021
• Economic Outlook U.S. Q4 2021: The Rocket Is Leveling Off, published Sept. 23, 2021
• U.S. Not-For-Profit Health Care Rating Actions, July 2021, published Aug. 10, 2021
• U.S. Not-For-Profit Health Care Rating Actions: August 2021, published Sept. 13, 2021
• Through The ESG Lens 2.0: A Deeper Dive Into U.S. Public Finance Credit Factors, published April 28, 2020