Full details of the medians are available through our interactive dashboard, by clicking here: https://www.spglobal.com/ratings/en/research-insights/sector-intelligence/interactives/us-pf-healthcare-medians-2023. The below image is a preview.

The post 2020 ratio improvement was largely eliminated in 2022

U.S. not-for-profit acute health care medians succumbed to significant labor and inflationary pressure coupled with volatility in the investment markets; this dampened 2022 medians virtually across the board compared with 2021 metrics (see table 1). The dip was especially evident coming after fiscal 2021 medians that indicated significant improvement relative to 2020 when the pandemic began and that were also supported by provider relief funding for most and strong investment returns. Although median trends for the entire portfolio were consistently weaker between 2022 and 2021, there was some volatility in medians for the sub-sectors including health care systems and stand-alone hospitals, due to the generally unstable operating environment, variance in the amount of provider relief and special funding, number of rating changes, and divergence in individual issuer performance. This is also evident by the larger than typical spread when comparing medians in the top half of the portfolio with those in the bottom half (see table 2).

Although weaker, these medians are generally in line with our expectations last year that ratios would moderate significantly. S&P Global Ratings views balance-sheet metrics as still providing some flexibility for operating softness as medians remained in the low 200s for days' cash on hand, which is consistent with much of the prior decade. Nevertheless, some of the cushion has faded relative to 2021's decade high, leaving less room for ratings to accommodate labor and various throughput issues that will likely be around for the next several years, affecting both revenue and expenses. These expectations are reflected in the higher-than-typical 22% of our ratings that currently carry negative outlooks. Nevertheless, we are seeing moderation from peak levels of expense inflation and the cost and usage of contract labor as well as some favorable investment market trends and a measured approach to capital spending despite recent increases, which could all contribute to slight improvements in the 2023 financial medians. This mirrors our outlook distribution with 78% of the ratings having either stable or positive outlooks as of June 30.

Table 1

Table 2

For additional information on the current sector view and expectations for the remainder of 2023, please see "U.S. Not-For-Profit Acute Health Care Midyear 2023 Update: Out Of Intensive Care And On The Path To Recovery Amid Ongoing Operating Challenges," published June 28, 2023, on RatingsDirect. For an overview of calendar year 2022 rating actions, please see "U.S. Not-For-Profit Acute Health Care Rating Actions, 2022 Year-End Review" published Feb. 28 on RatingsDirect.

Every 2022 financial performance ratio has weakened compared with 2021

Every financial performance median weakened in 2022, not only compared with fiscal 2021, but to a level below every year for the past decade. This represented a complete reversal of 2021 trends that saw broad-based improvement relative to 2020 (see chart 1). Although net patient service revenue continued to rise, this increase was more than offset by increasing total operating expenses. Other operating revenue, including provider relief and Federal Emergency Management Agency funds among other things, rose slightly and helped produce an essentially breakeven median operating margin median in 2022. Although the median operating margin was breakeven, actual operating margins varied considerably, from negative 34% to positive 28%, with about 40% of organizations posting negative margins of 1% or worse and 65 organizations (about 18% of the sample size) posting operating margins within a corridor of positive and negative 1%. Without provider relief funds, the median operating margin was negative 1.4% compared with negative 2.4% in 2020.

Other performance metrics showed similar trends with excess, operating EBIDA, and EBIDA margins all materially weaker than in 2021 and even below 2020 levels that arguably were the most significantly affected by the pandemic. While nonoperating income has at times helped offset operating margin compression and preserved debt service coverage, investment market volatility resulted in thinner than typical nonoperating revenue as a percent of total revenue (less than 2%). Although median debt service coverage was respectable at 3.3x, 64 organizations (about 17% of the sample size) had coverage of less than 1x (by S&P Global Ratings calculations, which do not always match calculations under legal documents) and many experienced covenant violations although there were no defaults on rated issuers in 2022.

Chart 1

Many balance-sheet metrics also weakened after multiple years of improvement

All the key liquidity and financial flexibility ratios were materially lower compared with 2021 medians, including days' cash on hand and unrestricted reserves compared with both long-term debt and contingent liabilities (see chart 2). However, while the days' cash on hand median in 2022 of 209.5 days represented a low not seen since 2013, it was only modestly lower than the medians from 2014 through 2019 that ranged from 210 to 217 days. The declines in unrestricted reserves relative to debt and contingent liabilities were somewhat more muted. As expected, a vast majority of those organizations with less than 100 days' cash on hand were in the 'BBB+' or lower rating categories.

Debt metrics were mixed, with a flat debt burden but slightly higher median debt as a percent of capitalization. The dynamics of recovering revenue helped support a level debt burden, while operating and investment losses dampened unrestricted net assets likely leading, along with additional debt issuance, to rising debt to capitalization. Although debt was issued for a variety of reasons last year, capital spending rebounded to a more typical level of 1.2x depreciation expense after moderating during 2020 and 2021, and we believe some of this spending was supported by debt. With rising interest rates debt issuance has decreased, and the funded status of defined-benefit pension plans has improved as management raised discount rates used for calculating future benefit obligations. The defined-benefit plan funded status was over 90% in both 2021 and 2022, which we view positively, as that typically translates into lower funding requirements and can help preserve unrestricted reserves.

Chart 2

A high number of negative outlooks indicate possible additional rating changes

After an essentially even number of downgrades and upgrades in 2021, rating actions skewed negative by a ratio of almost two downgrades for every one upgrade (see chart 3) in 2022. In addition, through the first six months of 2023, the ratio is even more unfavorable with almost three downgrades for every one upgrade. The ratio of downgrades to upgrades is not only skewing more negatively this year, but the number of rating actions increased 30% compared with the first six months of 2022 largely due to outsize labor expense growth that we expect will moderate this year, but remain elevated, and continue to affect ratings and financial performance. These actions and unfavorable outlook revisions both underscore our continued negative outlook on the sector.

Outlook revisions are following a similar trend, with a significant number of unfavorable outlook revisions far outpacing favorable revisions in 2022; this has continued into 2023 at an accelerated pace (see chart 4). This, in part, incorporates our measured approach on rating changes, particularly for those organizations that have enterprise or balance-sheet strength that can offset a period of cash flow volatility.

Chart 3

Chart 4

A favorable outlook change includes revision to positive from stable, to stable from negative, or the less-common occurrence to positive from negative, and vice versa for unfavorable outlook changes, where the rating itself doesn't change. For the unfavorable outlook revisions in 2022, most were to negative from stable while the favorable revisions were split almost evenly between negative to stable and stable to positive. Year to date, the unfavorable revisions follow similar trends as in 2022 and have contributed to a significant increase in negative outlooks to 22% of the total portfolio, which is double the number of negative outlooks last year and near levels seen during the first year of the pandemic in 2020 (see chart 5). Despite these changes, almost three-quarters of our ratings still have stable outlooks.

Although the number of rating changes and credit consolidation can change the rating distribution from year to year, significant movement between rating levels is unusual, and our rating distribution remains fairly similar to prior years (see chart 6). Both the 'A' and 'BBB' categories saw small declines as a percent of total ratings while the number of speculative-grade issuers increased and the 'AA' category remained stable, all reflecting recent trends of credit quality bifurcation. Our most common rating remains 'A', which is consistent with previous years.

Chart 5

Chart 6

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 issuers 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, 2021, and 2022 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 Health Care Stand-Alone Hospital Median Financial Ratios--2022, Aug. 7, 2023
• U.S. Not-For-Profit Health Care System Median Financial Ratios--2022, Aug. 7, 2023
• U.S. Not-For-Profit Health Care Children’s Hospital Median Financial Ratios--2022, Aug. 7, 2023
• U.S. Not-For-Profit Acute Health Care Speculative-Grade Median Financial Ratios--2022, Aug. 7, 2023
• U.S. Not-For-Profit Health Care Small Stand-Alone Hospital Median Financial Ratios--2022, Aug. 7, 2023
• U.S. Not-For-Profit Health Care Ratings And Outlooks As of June 30, 2023, July 24, 2023
• U.S. Not-For-Profit Health Care Midyear Update 2023: Out Of Intensive Care And On The Path To Recovery Amid Ongoing Operating Challenges, June 28, 2023
• U.S. Not-For-Profit Acute Health Care Rating Actions, 2022 Year-End Review, Feb. 28, 2023
• Outlook For U.S. Not-For-Profit Acute Health Care: A Long Road Ahead, Dec. 1, 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 2023, July 24, 2023
• U.S. Not-For-Profit Health Care Rating Actions, March And First-Quarter 2023, April 25, 2023