S&P Global Ratings maintained 24 ratings without revising the outlooks, took eight negative and two positive rating actions, and revised six outlooks unfavorably and one outlook favorably without changing the ratings in the U.S. not-for-profit health care sector in March.

Included in the eight negative rating actions was one issuer that was downgraded and placed on CreditWatch Negative. There were four new issuances in the month, with three ratings and outlooks unchanged and one rating lowered.

The 17 rating actions consist of the following:

• Eight downgrades on two health care systems and six stand-alone hospitals, five of which are now in the 'BBB' and speculative grade categories;
• Two upgrades due to the application of multiple revenue stream and guarantee criteria;
• Six unfavorable outlook revisions divided evenly between stand-alone hospitals and health care systems, also mostly in the 'BBB' and speculative grade categories. Five outlooks were revised to negative from stable, and one to stable from positive; and
• One favorable outlook revision to positive from stable on a stand-alone hospital in Maryland (Mercy Health Services).

Table 1

First-quarter rating actions were mostly negative as operating pressures continue

While we maintained ratings and outlooks on two-thirds of issuers reviewed through the first quarter of 2023, the ratings and outlooks changes were largely unfavorable and concentrated in the acute-care portfolios. The negative rating actions reflect ongoing pressures that we highlighted in our 2023 outlook for the not-for-profit acute-health care sector (see "Outlook For U.S. Not-For-Profit Acute Health Care: A Long Road Ahead", published Dec. 1, 2022, on RatingsDirect).

Unfavorable rating and outlook actions through the first quarter are affecting both systems and stand-alone providers and are occurring at all rating levels. About two-thirds of the actions were among stand-alone providers, with around half occurring in the 'BBB' category. There were ample rating changes and outlook revisions in the 'A' and speculative grade categories as well, although only a single rating action in the 'AA' category related to a merger and acquisition (upgrade to 'AA-' from 'A+'). Unsurprisingly, these actions were primarily driven by operating losses and weaker cash flow, mostly due to labor inflation and for those with less balance-sheet cushion.

The level of losses and extent of challenges vary significantly across issuer type and markets and even quarter by quarter. Demographics, regulatory and union conditions, competition for labor, and the payor environment are factors that could affect how quickly and to what degree performance improves in different markets. For example, we expect certain regions, like the Pacific Northwest, will experience a longer recovery period. However, as we receive December audits, which account for almost 40% of our portfolio, we will have a more complete picture of trends and a better idea about the pace of recovery given continued industry pressures.

Many management teams continue to deal with potential covenant challenges, with some looking at ways to restructure their debt to ease the burden of bank covenants, put springing master trust indentures in place, or negotiate for waivers. In addition, we believe options for securing additional liquidity are beginning to tighten as banks implement stricter lending practices and with higher interest rates.

Chart 1

Chart 2

Signs of some challenges easing; management actions and enterprise strengths are key

We believe the level of performance improvement for health care organizations will likely be mixed in 2023. Those organizations where we maintained credit ratings and stable outlooks generally have demonstrated adequate, or a trend of improving, financial performance that is becoming less reliant on provider-relief funds. Those issuers that might still be posting operating losses often have significant enterprise strength or have built up balance-sheet flexibility, allowing us to tolerate a period of weaker margins at the same rating level.

Balance sheets are stabilizing after significant market declines in 2022, but absent a market rebound, are likely to not improve materially in the near-term given weaker cash flow. In addition, some organizations are progressing with strategic capital projects as demand and need are present, particularly for larger issuers with healthy enterprise strength. Those entities tend to want to preserve reserves and fund capital from other sources, including, but not limited to, debt.

Management teams, even those with positive margins, have been focused on performance improvement plans primarily to address universal labor pressures because, while contract labor costs and usage abated, higher wages and benefits are embedded in future costs. Other initiatives include: supply chain (especially to address rising pharmaceutical costs); payor negotiations that seem to be gaining traction but are often phased and unlikely to fully offset the rate of inflation; focus on labor recruitment, retention, and turnover; and revenue diversification to lessen reliance on acute-care services.

Table 2