Rating And Outlook Overview

Rated health care system portfolio size remains stable.   The number of systems rated by S&P Global Ratings has held at 162, of which 156 (or 96%) are included in the 2022 medians. This stability, despite continued credit consolidation, is due to new issuers as well as stand-alone hospitals transitioning into systems per our criteria given revenue growth and added acute care facilities.

System rating distribution shifts downward, though still skewed to higher categories.   Larger and more highly rated acute care credits have not been immune from the broad sector operating pressures. Systems rated in the 'AA' category declined to 41%, after holding stable near 44% throughout the pandemic. There were concurrent increases in the 'A' and 'BBB' categories, with the median system rating remaining 'A+'. Despite this movement, the ratings for systems reflect their robust enterprise profiles characterized by greater scale and diversity, with generally sophisticated operating strategies and good depth and breadth of management teams. Speculative-grade rated systems remain rare, encompassing only five credits and therefore excluded from tables 2, 3A, 3B, and 3C.

Rating distribution for systems remains comparatively stronger than stand-alone hospitals despite certain financial metrics being weaker.   About 88% of systems are rated in the 'AA' or 'A' categories. By comparison, just 57% of stand-alone hospitals are rated in these categories, despite most financial medians being favorable to those of systems. Many notable outliers notwithstanding, we continue to observe generally lower rating volatility among the system issuers. The median stand-alone hospital rating is 'A-'.

Negative outlooks rise substantially, surpassing previous peak of 2020.   After falling steadily the previous two years, the percentage of systems that have a negative outlook more than doubled in 2023, now encompassing one-in-five rated systems. This compares with a previous high of 17% in 2020, and a pre-pandemic level of 5% in 2019. We believe it is possible this is a high point for negative outlooks given financial profiles are generally improving and a revision to stable at the current rating is possible, though some may be concurrent with a downgrade. Future rating actions will hinge on operating recovery efforts and overall credit quality. Accordingly, and given the sample's already higher median rating level, positive outlooks remain low near 2%.

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Key Median Takeaways

The operating volatility and continued rating transitions over the past year, coupled with various uneven revenue items related to provider relief funds, FEMA grants, and state supplemental programs, present some unique limitations in the comparison of medians across health care systems and stand-alone hospitals, as well as between rating categories and the prior year. Clear conclusions or developing trends could be somewhat challenging to identify without the benefit of an additional one to two years of data. For this report, we've provided an additional view of the overall system median data with lower and upper half medians for select financial metrics to highlight dispersion of the median data and also compared that data to 2019, the last year of medians before the COVID-19 pandemic.

Top-line growth slows in 2022.   Median net patient revenue and total operating revenue both grew by about 5%, well below growth observed in 2021 given a depressed 2020, and notably lower than pre-pandemic levels consistently near 8% and relative to stand-alone hospitals. Of the many factors behind this, we view reduced provider relief funds, softer inpatient utilization, and challenges staffing existing capacity as likely contributors. Median system operating revenue is now near $3.6 billion, reflecting both the organic growth of health systems across the country as well as from mergers and acquisitions. In addition, the meaningful variance between median net patient revenue and total operating revenue for 'AA' category providers highlights revenue diversity that can come from provider-sponsored health plans, specialty pharmacy programs, and other operating activities.

Median operating performance turns negative for the first time, following peak profitability in 2021.   System operating margins declined for every rating level aside from the extremely small 'BBB/BBB-' group. The negative 0.4% median operating margin for systems in 2022 represents the largest year-over-year shift in this measure over the past decade. In addition, when coupled with challenged investment markets and limited non-operating revenue, maximum annual debt service coverage fell below 4x, which had previously been an unbroken floor. Only the 'AA+' and 'AA' rating levels generated a positive operating margin when adjusting for nonrecurring items, mostly provider relief funds, indicating further recovery headwinds remain as stimulus tapers.

Unrestricted reserves greatly tempered with investment market volatility and reduced cash flow.   After years of steady growth, key system liquidity metrics, namely days' cash on hand and unrestricted reserves to long-term debt, regressed to 2017 levels. Specifically, days' cash on hand declined 20% from peak 2021, as investment values weakened and daily cash operating expenses increased due to inflation and increased labor costs. Exemplifying the sector's exposure to broader economic and investment market trends, no rating level was immune to this decline, though 'AA' category rating levels continue to be characterized by robust reserves. Lastly, we also observed an increase in capital spending across all rating levels in the 'AA' and 'A' categories, contributing to pressured reserves as some strategic investments resumed following a period of restrained spending.

Debt profile largely stable as pension funded status improved, but incremental debt and declining unrestricted net assets pushed up leverage.   Median leverage for systems returned to above 30% in 2022 as a result of higher median debt loads, particularly at higher rating levels, and reduced net assets affected by investment market losses and weaker cash flow. Partly offsetting this shift, defined-benefit pension plans had a median funded status of 93% aided by rising discount rates. All rating levels in the 'AA' and 'A' categories had a funded status above 90%, aside from the 'A' rating level (88%). This compares with an average of 80% the previous decade. Debt structures have also de-risked with contingent debt representing just 25% of long-term debt, the lowest level since we started tracking the figure in 2014. For many systems, debt capacity at a given rating is predominantly limited by weaker cash flow and unrestricted reserves, not necessarily existing liabilities.

Other indicators align with worsened financial picture in 2022.   Various other medians were aligned with the broad weakening cited above, including reduced non-operating revenue as a percentage of total operating revenue, a reduced cushion ratio, and salaries and benefits expense as a percentage of net patient revenue regressing back above 60%. Median cash flow to total liabilities fell by 40% for systems, indicative of the incredible contrast between 2021 and 2022.

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Table 2

Table 3A

Table 3B

Table 3C

Table 4

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 Acute Health Care 2022 Medians: Historically Low Metrics Signify A Long Road To A New Normal, Aug. 7, 2023
• U.S. Not-For-Profit Health Care Stand-Alone Hospital 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