Rating And Outlook Overview
Number of rated children's hospitals remains stable. The number of rated children's hospitals has remained stable year-over-year at 21. Portfolio movement is limited, as merger and acquisitions are rare in the segment, and no new issuers were added to the group. All our rated children's hospitals are stand-alone hospitals, with one exception (Texas Children's Hospital is a system).
Ratings distribution skewed toward the 'AA' category. Children's hospitals are skewed toward higher rating categories relative to the broader group of not-for-profit acute health care credits, with 19 of our 21 issuers in the 'AA' or 'A' category, and only two in the 'BBB' category, reflecting generally stronger credit quality. The higher ratings are generally supported by the hospitals' institutional strengths and positions in the market as often they are the only one or one of few providers of tertiary and quaternary pediatric services, along with their healthy financial profiles.
Outlooks remain predominantly stable. The outlook for almost all ratings in this group are stable, with one credit having a positive outlook and no negative outlooks. This speaks to the generally higher ratings and overall credit stability of the segment, with children's hospitals able to absorb the volatility which has plagued the sector in the last two years.
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Key Median Takeaways
Overall improvements in credit metrics. In 2021, children's hospitals experienced strengthening of their overall credit metrics in both the 'AA' and 'A' categories, driven by a rebound in financial performance from weaker 2020 results which were hampered by COVID-19 headwinds, and continued to exhibit metrics that are generally stronger than stand-alone hospitals. COVID-19 stimulus relief funds continued to support operating performance in 2021, though to a lesser extent than in the prior year. The medians exclude the two 'BBB' category providers due to the small sample size.
Improved profitability with strong excess margins. Financial performance improved in fiscal 2021 for both 'AA' and 'A' rating categories from the 2020 troughs, with operating margins now slightly above pre-pandemic levels and driven by the rebound in volumes and COVID-19 related stimulus funds. MADS coverage also improved, and now surpasses 2019 levels, aided by solid non-operating income, which also supported high excess margins. Non-operating revenue represented an increasing percentage of net patient revenue, which underscores the contribution of investment performance and children's historically healthy balance sheets, as well as fundraising to the overall performance improvement in 2021.
Improved reserves for both 'A' and 'AA' category issuers, with the latter showing improvement across all related areas. Days' cash on hand and unrestricted reserves-to-long-term debt further improved for 'AA' rated issuers in 2021 aided by improving operating performance, as well as solid investment returns and ongoing philanthropy and despite growing capital spending. For 'A' rated organizations, it was a mixed story, with a meaningful improvement in unrestricted reserves and days' cash on hand in part due to lower capital spending (and an associated rise in average age of plant), but lower unrestricted reserves relative to debt.
Leverage continues to improve for 'AA' and 'A' issuers. The debt profile for the 'AA' category continued to strengthen, with balance sheet related debt metrics improving from prior year levels and better than our general acute-care hospital cohort. Medians for the 'A' category also showed improvements in leverage over the prior year although this was offset by a rising debt burden and higher levels of contingent liabilities-to-long-term debt for the segment. Certain 'A' category debt related ratios were lighter than the acute care hospital cohort, but this could also be influenced by a smaller sample size. The funded status of defined-benefit plans for both rating categories rose to levels reaching 100%, thereby reducing overall pension risk for the segment.
Certain ratios highlight some of the unique characteristics of children's hospitals. Interestingly, salaries and benefits as a percentage of net patient revenues for 'AA' category credits are broadly higher than the stand-alone medians, potentially because many of these children's hospitals have significant research and educational expenses that do not contribute directly to net patient service revenue growth. For both 'AA' and 'A' credits, this ratio moderated compared with 2020. Finally, while management teams remained focus on revenue cycle improvements to aid in cash flow, the increase in days in accounts receivable suggests payers are returning to behaviors more in line with 2019 and may also be reflective of Children's hospitals generally higher Medicaid payor mix and state supplemental programs.
Table 1
| U.S. Not-For-Profit Children’s Hospital Medians*** By Rating Category--2021 vs. 2020 vs. 2019 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| AA | A | |||||||||||||
| Fiscal year | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | ||||||||
| Sample size | 14 | 12 | 13 | 5 | 6 | 6 | ||||||||
| Financial performance | ||||||||||||||
| Net patient revenue ($000s) | 1,238,433 | 1,151,196 | 1,103,152 | 1,172,954 | 1,136,653 | 1,082,277 | ||||||||
| Total operating revenue ($000s) | 1,639,920 | 1,613,635 | 1,270,660 | 1,235,474 | 1,285,490 | 1,175,380 | ||||||||
| Total operating expenses ($000s) | 1,528,660 | MNR | MNR | 1,090,015 | MNR | MNR | ||||||||
| Operating income ($000s) | 68,820 | MNR | MNR | 82,010 | MNR | MNR | ||||||||
| Operating margin (%) | 6.1 | 4.9 | 5.8 | 5.2 | 1.9 | 5.1 | ||||||||
| Net nonoperating income ($000s) | 91,880 | MNR | MNR | 23,872 | MNR | MNR | ||||||||
| Excess income ($000s) | 173,653 | MNR | MNR | 104,052 | MNR | MNR | ||||||||
| Excess margin (%) | 10.3 | 7.1 | 8.9 | 9.4 | 3.4 | 7.0 | ||||||||
| Operating EBIDA margin (%) | 11.7 | 11.6 | 13.4 | 12.0 | 9.5 | 12.0 | ||||||||
| EBIDA margin (%) | 16.1 | 13.4 | 15.0 | 15.9 | 10.4 | 14.1 | ||||||||
| Net available for debt service ($000s) | 263,098 | 174,185 | 204,569 | 245,375 | 168,273 | 187,913 | ||||||||
| Maximum annual debt service ($000s) | 24,509 | MNR | MNR | 34,726 | MNR | MNR | ||||||||
| Maximum annual debt service coverage (x) | 9.5 | 6.4 | 8.1 | 5.4 | 4.1 | 4.7 | ||||||||
| Operating lease-adjusted coverage (x)* | 7.3 | 4.5 | 5.5 | 4.1 | 3.0 | 3.6 | ||||||||
| Liquidity and financial flexibility | ||||||||||||||
| Unrestricted reserves ($000s) | 1,537,475 | 1,417,895 | 1,119,495 | 1,184,698 | 940,599 | 741,594 | ||||||||
| Unrestricted days' cash on hand | 484.4 | 469.6 | 435.3 | 360.7 | 305.8 | 263.4 | ||||||||
| Unrestricted reserves/total long-term debt (%) | 423.6 | 393.7 | 387.6 | 159.4 | 171.8 | 150.2 | ||||||||
| Unrestricted reserves/contingent liabilities (%)* | 2,164.5 | 1,727.3 | 1,142.9 | 719.1 | 768.3 | 479.9 | ||||||||
| Average age of plant (years) | 10.3 | 10.1 | 9.8 | 11.5 | 10.4 | 9.4 | ||||||||
| Capital expenditures/depreciation and amortization (%) | 137.7 | 134.1 | 116.1 | 76.1 | 100.2 | 102.3 | ||||||||
| Debt and liabilities | ||||||||||||||
| Total long-term debt ($000s) | 405,212 | MNR | MNR | 669,669 | MNR | MNR | ||||||||
| Long-term debt/capitalization (%) | 16.0 | 16.7 | 17.8 | 26.8 | 29.1 | 30.6 | ||||||||
| Contingent liabilities ($000s)* | 130,050 | MNR | MNR | 166,705 | MNR | MNR | ||||||||
| Contingent liabilities/total long-term debt (%)* | 17.5 | 22.8 | 26.8 | 21.9 | 19.4 | 29.3 | ||||||||
| Debt burden (%) | 1.9 | 2.3 | 1.9 | 3.1 | 2.9 | 2.8 | ||||||||
| Defined-benefit plan funded status (%)* | 99.9 | 86.5 | 89.9 | 100.0 | 99.3 | 82.9 | ||||||||
| Miscellaneous | ||||||||||||||
| Salaries & benefits/NPR (%) | 63.5 | 67.0 | 60.0 | 53.5 | 58.4 | 57.1 | ||||||||
| Nonoperating revenue/total revenue (%) | 5.4 | 3.4 | 3.2 | 3.9 | 2.0 | 3.2 | ||||||||
| Cushion ratio (x) | 67.5 | 51.9 | 51.9 | 27.4 | 26.9 | 28.4 | ||||||||
| Days in accounts receivable | 63.5 | 54.0 | 55.0 | 57.9 | 50.2 | 58.4 | ||||||||
| Cash flow/total liabilities (%) | 28.8 | 20.8 | 29.1 | 16.0 | 12.7 | 16.2 | ||||||||
| Pension-adjusted long-term debt/capitalization (%)* | 15.9 | 16.5 | 17.8 | 26.8 | 29.0 | 30.6 | ||||||||
| Adjusted operating margin (%)** | 2.8 | MNR | MNR | 4.8 | MNR | MNR | ||||||||
| MNR--median not reported. *These ratios are only for organizations that have defined-benefit pension plans, operating leases, or contingent liabilities. **Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to COVID-19 stimulus funds recognized, but could comprise other nonrecurring items. ***These medians exclude two 'BBB' category providers in 2021 and in 2020, and one 'BBB' category provider in 2019 due to small sample size. | ||||||||||||||
Table 2
| U.S. Not-For-Profit Children’s Hospital Medians*** vs. Stand-Alone Medians By Rating Category--2021 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| AA | A | |||||||||
| Children's hospitals | Stand-alone hospitals | Children's hospitals | Stand-alone hospitals | |||||||
| Sample size | 14 | 39 | 5 | 97 | ||||||
| Financial performance | ||||||||||
| Net patient revenue ($000s) | 1,238,433 | 1,121,775 | 1,172,954 | 505,430 | ||||||
| Total operating revenue ($000s) | 1,639,920 | 1,456,287 | 1,235,474 | 532,808 | ||||||
| Total operating expenses ($000s) | 1,528,660 | 1,362,371 | 1,090,015 | 518,839 | ||||||
| Operating income ($000s) | 68,820 | 53,930 | 82,010 | 13,969 | ||||||
| Operating margin (%) | 6.1 | 5.1 | 5.2 | 3.8 | ||||||
| Net nonoperating income ($000s) | 91,880 | 55,251 | 23,872 | 17,876 | ||||||
| Excess income ($000s) | 173,653 | 159,152 | 104,052 | 38,852 | ||||||
| Excess margin (%) | 10.3 | 9.8 | 9.4 | 7.2 | ||||||
| Operating EBIDA margin (%) | 11.7 | 11.0 | 12.0 | 9.3 | ||||||
| EBIDA margin (%) | 16.1 | 15.6 | 15.9 | 13.0 | ||||||
| Net available for debt service ($000s) | 263,098 | 242,493 | 245,375 | 76,440 | ||||||
| Maximum annual debt service ($000s) | 24,509 | 24,237 | 34,726 | 13,170 | ||||||
| Maximum annual debt service coverage (x) | 9.5 | 8.0 | 5.4 | 5.5 | ||||||
| Operating lease-adjusted coverage (x)* | 7.3 | 6.4 | 4.1 | 4.6 | ||||||
| Liquidity and financial flexibility | ||||||||||
| Unrestricted reserves ($000s) | 1,537,475 | 1,299,068 | 1,184,698 | 424,577 | ||||||
| Unrestricted days' cash on hand | 484.4 | 423.9 | 360.7 | 308.7 | ||||||
| Unrestricted reserves/total long-term debt (%) | 423.6 | 370.2 | 159.4 | 243.2 | ||||||
| Unrestricted reserves/contingent liabilities (%)* | 2,164.5 | 1,391.7 | 719.1 | 876.5 | ||||||
| Average age of plant (years) | 10.3 | 11.0 | 11.5 | 12.1 | ||||||
| Capital expenditures/depreciation and amortization (%) | 137.7 | 123.0 | 76.1 | 107.9 | ||||||
| Debt and liabilities | ||||||||||
| Total long-term debt ($000s) | 405,212 | 342,465 | 669,669 | 149,778 | ||||||
| Long-term debt/capitalization (%) | 16.0 | 18.0 | 26.8 | 23.7 | ||||||
| Contingent liabilities ($000s)* | 130,050 | 115,873 | 166,705 | 52,363 | ||||||
| Contingent liabilities/total long-term debt (%)* | 17.5 | 23.7 | 21.9 | 26.3 | ||||||
| Debt burden (%) | 1.9 | 1.9 | 3.1 | 2.4 | ||||||
| Defined-benefit plan funded status (%)* | 99.9 | 97.5 | 100.0 | 89.3 | ||||||
| Miscellaneous | ||||||||||
| Salaries & benefits/NPR (%) | 63.5 | 58.9 | 53.5 | 55.8 | ||||||
| Nonoperating revenue/total revenue (%) | 5.4 | 4.7 | 3.9 | 3.5 | ||||||
| Cushion ratio (x) | 67.5 | 48.7 | 27.4 | 32.0 | ||||||
| Days in accounts receivable | 63.5 | 54.8 | 57.9 | 48.9 | ||||||
| Cash flow/total liabilities (%) | 28.8 | 24.8 | 16.0 | 18.3 | ||||||
| Pension-adjusted long-term debt/capitalization (%)* | 15.9 | 17.5 | 26.8 | 24.9 | ||||||
| Adjusted operating margin (%)** | 2.8 | 3.0 | 4.8 | 0.8 | ||||||
| MNR--median not reported. *These ratios are only for organizations that have defined-benefit pension plans, operating leases, or contingent liabilities. **Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to COVID-19 stimulus funds recognized, but could comprise other nonrecurring items. ***The children's hospital medians exclude two 'BBB' category providers. | ||||||||||
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 and 2021 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 2021 Medians: Peak Performance Highlights Cushion As Sector Encounters A Challenging Period, Aug. 24, 2022
- U.S. Not-For-Profit Health Care Stand-Alone Hospital Median Financial Ratios--2021, Aug. 24, 2022
- U.S. Not-For-Profit Health Care System Median Financial Ratios--2021, Aug. 24, 2022
- U.S. Not-For-Profit Acute Health Care Speculative Grade Median Financial Ratios--2021, Aug. 24, 2022
- U.S. Not-For-Profit Health Care Small Stand-Alone Hospital Median Financial Ratios--2021, Aug. 24, 2022
- U.S. Not-For-Profit Health Care Ratings And Outlooks As of June 30, 2021, July 21, 2022
- Outlook For U.S. Not-For-Profit Acute Health Care: Navigating The Bumps While Getting Back On Track, Jan. 12, 2021
- U.S. Not-For-Profit Acute Health Care Midyear 2022 Update: Providers Face Mounting Pressures From Inflation And Labor Costs, June 27, 2022
- Outlook For U.S. Not-For-Profit Acute Health Care: A Booster May Be Needed, Jan. 6, 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 2022, July 25, 2022
- U.S. Not-For-Profit Health Care Rating Actions, March And First-Quarter 2022, April 27, 2022
This report does not constitute a rating action.
| Primary Credit Analysts: | Marc Bertrand, Chicago + 1 (312) 233 7116; marc.bertrand@spglobal.com |
| Suzie R Desai, Chicago + 1 (312) 233 7046; suzie.desai@spglobal.com | |
| Secondary Contact: | Stephen Infranco, New York + 1 (212) 438 2025; stephen.infranco@spglobal.com |
| Research Contributors: | Kunal Salunke, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
| Akul Patel, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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