Governmental not-for-profit acute health care entities, usually without significant tax revenue benefits or tax-backed debt, are increasingly converting to private 501c3s. These providers are converting to capture efficiencies and compete more effectively in a challenged operating environment within an evolving health care landscape. Rating implications are specific to each scenario, but S&P Global Ratings generally views conversions as neutral factors with positive credit potential over time should benefits be realized.
Chart 1
What's Happening
While each entity's rationale for converting to a private 501c3 is slightly different, they all generally aim to increase operating flexibility.
Commonly cited benefits include:
- Increased flexibility with partnerships and joint ventures, as well as increased attraction from parties reluctant to partner with a public entity.
- Ability to operate outside official county or district geographic boundaries.
- Avoidance of mandatory participation in statewide cost-sharing multiple employer pension plans.
- Ability to invest reserves in a broader set of asset classes such as equities and alternatives.
- Removal of public disclosure requirements that can disadvantage strategic planning.
- Establishment of a self-perpetuating board, replacing an appointed or elected structure and providing greater insulation from external politics and influence.
Commonly cited offsets or challenges include:
- Required approvals from local and state leaders and management of community public relations, as well as bondholder consent or amendments if necessary.
- Loss of certain funding streams afforded to public entities, such as specific supplemental funding, county appropriations, or a tax levy.
- Loss of professional liability limitations or sovereign immunity in some cases that can increase expenses as a private entity.
- Execution and transition risk related to the creation of a new legal operating entity.
Why It Matters
Added efficiencies are viewed as increasingly necessary given the realities of the health care sector and need to compete with private providers. Even with a dominant local market position, which is not uncommon for these providers, entities that convert often cite the need for nimble decision making, confidential strategic planning, and ease of partnerships and joint ventures, among other imperatives. That said, we do not view public acute health care providers as being inherently at a disadvantage, competitively or financially, to private providers. Moreover, even in the absence of a self-perpetuating board, most appointed boards have performed well and are neutral rating factors.
We see limited immediate impact to financials with conversions. Given we align our financial adjustments for Governmental Accounting Standards Board (GASB) entities with Financial Accounting Standards Board (FASB) standards, post-conversion we typically don't see material shifts in metrics such that our view of the credit profile changes. Even when there are specific balance-sheet metric shifts, such as for lease liabilities or with defined-benefit pension benefit obligations where FASB pension discount rates can cause a widened unfunded status, we've typically already factored that into our analysis.
What Comes Next
We believe more conversions are likely over time. From a credit rating perspective, we generally view conversions as neutral factors, with potentially positive credit impact over time should benefits be realized. This remains case-by-case and rating actions are tied to the provider's underlying credit strengths and weaknesses, and any revised post-conversion strategic plans.
These transitions carry some integration and execution risk as new contracts, licenses, and operating strategies are defined and implemented. The rationale for conversion is often to enable greater growth and expansion, which itself could constrain the rating depending on the rate and magnitude of such plans.
Related Research
- U.S. Not-For-Profit Acute Health Care Providers 2024 Outlook: Historical Peak Of Negative Outlooks Signals Ongoing Challenges, published Dec. 6, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Patrick Zagar, Dallas + 1 (214) 765 5883; patrick.zagar@spglobal.com |
| Secondary Contacts: | Suzie R Desai, Chicago + 1 (312) 233 7046; suzie.desai@spglobal.com |
| Stephen Infranco, New York + 1 (212) 438 2025; stephen.infranco@spglobal.com | |
| Blake C Fundingsland, Englewood + 1 (303) 721 4703; blake.fundingsland@spglobal.com |
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