Rating And Outlook Overview
The number of rated children's hospitals remains stable. Year over year, the number of children's hospitals rated by S&P Global Ratings has remained steady at 22 providers. Rating activity remains limited, as mergers and acquisitions are rare, business positions remain healthy, and financial performance has historically been stable. Most of our rated children's hospitals are considered stand-alone hospitals per our criteria, with the exception of Houston-based Texas Children's Hospital and Children's Hospital Colorado, which own multiple hospitals and are considered systems.
Ratings distribution is skewed toward the 'AA' category. Children's hospital ratings remain skewed toward higher rating categories relative to the broader group of not-for-profit acute care providers, with 91% rated in the 'AA' or 'A' categories reflecting the cohort's generally strong credit quality. The higher ratings are supported by the hospitals' institutional strengths and positions in their respective markets, as often they are the only provider of tertiary and quaternary pediatric services. The hospitals' generally healthy financial profiles, albeit with support from supplemental funds, and sound balance sheets also support our higher ratings and help offset higher Medicaid exposure.
Downgrades are concentrated in lower-rated organizations. We lowered the ratings on two children's hospitals, both in the 'BBB' category, with one falling to speculative-grade. The organizations had experienced multiple years of operating losses, diminishing unrestricted reserves, and weaker debt-related metrics.
Outlooks remain predominantly stable. The outlooks for the vast majority of ratings in this group are stable, speaking to the generally higher ratings and overall credit strength of the segment. However, one issuer has a positive outlook and two have negative outlooks. Of the negative outlooks, one reflects the intense rating pressure on our only speculative-grade rated issuer; the other entity has a higher rating, but has a negative outlook that reflects weakening performance in an expanding system. Overall, children's hospitals have been able to absorb industrywide expense pressures better than the sector at large; however, the spreads between children's hospital and stand-alone medians did narrow in 2023.
Chart 1
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Key Median Takeaways
Operating performance weakened in fiscal 2023 but median margins remained firmly positive. Children's hospitals experienced weakened median operating performance and lower margins in 2023 compared with 2022. Industry pressures on labor and supply costs were key contributors to median operating expense growth exceeding median operating revenue growth for the children's hospitals that we rate, though we believe sustained high-acuity demand and favorable commercial payor relationships have helped mitigate these headwinds. That said, this median growth trend differs from our overall medians where median operating expense growth tapered relative to median total operating revenue growth. Despite the decrease in all margins, children's hospital medians largely remain the same as or stronger than those for stand-alone hospitals with comparable ratings. Notwithstanding margin pressure, a solid 73% of organizations continued to report operating profits, an equivalent number with the previous year.
Debt service coverage is favorable compared with stand-alone medians. Maximum annual debt service coverage for children's hospitals' medians in both the 'AA' and 'A' rating categories decreased just slightly from 2022. While that median ratio declined slightly between years, it remained solid and favorable compared with stand-alone hospital medians. For the 'AA' category, we noted a decline in cash flow likely contributing to the slightly lighter coverage ratio (the smaller population of 'A' category hospitals may be affecting that median ratio as related medians are mixed).
Days' cash on hand weakened in 2023. In 2023, median days' cash on hand (DCOH) weakened but reserves to long-term debt strengthened for this cohort. Median unrestricted reserves for the 'A' and 'AA' categories rose at varying rates with the slow recovery of investment returns. Combined with high expense growth, however, DCOH declined for both the 'A' and 'AA' categories. As a result, the 'AA' DCOH median dropped below 400, still healthy, but its lowest since 2016, and the 'A' DCOH median fell below 300, comparable with pre-pandemic levels. While the DCOH medians for children's hospitals remain favorable compared with those for similarly rated stand-alone hospitals, 'AA' rated hospitals experienced a significant narrowing of that lead.
Debt metrics remained solid. Despite weakened DCOH medians, children's hospitals, like many organizations in the broader acute health care group, strengthened their unrestricted reserves to long-term debt ratio with minimal new money debt and modest increases in reserves. Unrestricted reserves to long-term debt ratio medians for both 'AA' and 'A' rated entities improved, with the 'AA' median remaining consistently stronger than the median for stand-alone hospitals, and the median for the small population of 'A' rated children's hospitals closing the gap with stand-alone hospitals. Other debt medians, namely long-term debt to capitalization, debt burden, and contingent liabilities to long-term debt, largely remain comparable with those of 2022 and comparable with stand-alone medians.
Table 1
| U.S. not-for-profit children’s hospital medians by rating category -- 2023 vs. 2022 vs. 2021 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| AA | A | |||||||||||||
| Fiscal year | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | ||||||||
| Sample size | 15 | 15 | 14 | 5 | 5 | 5 | ||||||||
| Financial performance | ||||||||||||||
| Net patient revenue (NPR) ($000s) | 1,737,587 | 1,619,380 | 1,238,433 | 1,372,555 | 1,255,390 | 1,172,954 | ||||||||
| Total operating revenue ($000s) | 1,940,462 | 1,893,993 | 1,639,920 | 1,434,276 | 1,305,116 | 1,235,474 | ||||||||
| Total operating expenses ($000s) | 1,837,304 | 1,705,999 | 1,528,660 | 1,334,949 | 1,198,954 | 1,090,015 | ||||||||
| Operating income ($000s) | 52,482 | 71,440 | 68,820 | 72,301 | 38,605 | 82,010 | ||||||||
| Operating margin (%) | 3.0 | 5.1 | 6.1 | 2.7 | 4.2 | 5.2 | ||||||||
| Net nonoperating income ($000s) | 75,650 | 58,218 | 91,880 | 22,696 | 11,630 | 23,872 | ||||||||
| Excess income ($000s) | 150,018 | 139,305 | 173,653 | 69,772 | 50,235 | 104,052 | ||||||||
| Excess margin (%) | 5.8 | 6.8 | 10.3 | 3.4 | 5.9 | 9.4 | ||||||||
| Operating EBIDA margin (%) | 9.4 | 12.1 | 11.7 | 7.3 | 9.6 | 12.0 | ||||||||
| EBIDA margin (%) | 12.2 | 13.7 | 16.1 | 9.0 | 12.4 | 15.9 | ||||||||
| Net available for debt service ($000s) | 291,288 | 322,857 | 263,098 | 176,701 | 112,266 | 245,375 | ||||||||
| Maximum annual debt service ($000s) | 30,095 | 26,025 | 24,509 | 39,479 | 38,641 | 34,726 | ||||||||
| Maximum annual debt service coverage (x) | 6.5 | 6.7 | 9.5 | 4.5 | 4.7 | 5.4 | ||||||||
| Operating lease-adjusted coverage (x) | 5.2 | 5.3 | 7.3 | 3.5 | 3.9 | 4.1 | ||||||||
| Liquidity and financial flexibility | ||||||||||||||
| Unrestricted reserves ($000s) | 1,664,383 | 1,552,570 | 1,537,475 | 1,189,946 | 1,164,932 | 1,184,698 | ||||||||
| Unrestricted days' cash on hand | 377.8 | 417.2 | 484.4 | 294.0 | 301.5 | 360.7 | ||||||||
| Unrestricted reserves/total long-term debt (%) | 382.9 | 366.7 | 423.6 | 203.1 | 160.6 | 159.4 | ||||||||
| Unrestricted reserves/contingent liabilities (%)* | 2,013.6 | 1,786.3 | 2,164.5 | 882.0 | 855.0 | 719.1 | ||||||||
| Average age of plant (years) | 11.2 | 11.4 | 10.3 | 10.9 | 10.7 | 11.5 | ||||||||
| Capital expenditures/depreciation and amortization (%) | 170.8 | 184.6 | 137.7 | 101.8 | 134.3 | 76.1 | ||||||||
| Debt and liabilities | ||||||||||||||
| Total long-term debt ($000s) | 447,426 | 459,718 | 405,212 | 671,876 | 689,084 | 669,669 | ||||||||
| Long-term debt/capitalization (%) | 16.9 | 16.7 | 16.0 | 25.2 | 26.8 | 26.8 | ||||||||
| Contingent liabilities ($000s)* | 80,000 | 80,000 | 130,050 | 163,385 | 128,580 | 166,705 | ||||||||
| Contingent liabilities/total long-term debt (%)* | 27.2 | 27.1 | 17.5 | 22.0 | 16.8 | 21.9 | ||||||||
| Debt burden (%) | 1.8 | 1.8 | 1.9 | 2.4 | 2.6 | 3.1 | ||||||||
| Defined-benefit plan funded status (%)* | 102.0 | 102.1 | 99.9 | N/A | N/A | 100.0 | ||||||||
| Miscellaneous | ||||||||||||||
| Salaries & benefits/NPR (%) | 63.1 | 59.8 | 63.5 | 60.2 | 55.9 | 53.5 | ||||||||
| Nonoperating revenue/total revenue (%) | 4.1 | 2.4 | 5.4 | 2.1 | 3.3 | 3.9 | ||||||||
| Cushion ratio (x) | 57.6 | 60.3 | 67.5 | 34.0 | 25.8 | 27.4 | ||||||||
| Days in accounts receivable | 57.1 | 60.1 | 63.5 | 62.0 | 58.5 | 57.9 | ||||||||
| Cash flow/total liabilities (%) | 23.5 | 20.8 | 28.8 | 14.8 | 18.0 | 16.0 | ||||||||
| Pension-adjusted long-term debt/capitalization (%)* | 16.9 | 16.9 | 15.9 | 25.2 | 26.9 | 26.8 | ||||||||
| Adjusted operating margin (%)§ | 3.0 | 4.7 | 2.8 | 2.6 | 3.8 | 4.8 | ||||||||
| N/A--Not applicable. *These ratios are only for organizations that have defined-benefit pension plans or contingent liabilities. §Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to stimulus funding, FEMA reimbursement, and 340B settlement funding, but could comprise other nonrecurring items. | ||||||||||||||
Table 2
| U.S. not-for-profit children’s hospital medians vs. stand-alone medians by rating category -- 2023 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| AA | A | |||||||||
| Children's hospitals | Stand-alone hospitals | Children's hospitals | Stand-alone hospitals | |||||||
| Sample size | 15 | 35 | 5 | 92 | ||||||
| Financial performance | ||||||||||
| Net patient revenue (NPR) ($000s) | 1,737,587 | 1,520,710 | 1,372,555 | 572,363 | ||||||
| Total operating revenue ($000s) | 1,940,462 | 1,793,059 | 1,434,276 | 608,974 | ||||||
| Total operating expenses ($000s) | 1,837,304 | 1,763,730 | 1,334,949 | 578,536 | ||||||
| Operating income ($000s) | 52,482 | 37,883 | 72,301 | 4,396 | ||||||
| Operating margin (%) | 3.0 | 3.0 | 2.7 | 0.9 | ||||||
| Net nonoperating income ($000s) | 75,650 | 58,863 | 22,696 | 11,900 | ||||||
| Excess income ($000s) | 150,018 | 97,719 | 69,772 | 13,388 | ||||||
| Excess margin (%) | 5.8 | 5.3 | 3.4 | 3.3 | ||||||
| Operating EBIDA margin (%) | 9.4 | 8.7 | 7.3 | 6.6 | ||||||
| EBIDA margin (%) | 12.2 | 11.0 | 9.0 | 8.9 | ||||||
| Net available for debt service ($000s) | 291,288 | 214,879 | 176,701 | 44,676 | ||||||
| Maximum annual debt service ($000s) | 30,095 | 30,095 | 39,479 | 15,231 | ||||||
| Maximum annual debt service coverage (x) | 6.5 | 5.8 | 4.5 | 3.6 | ||||||
| Operating lease-adjusted coverage (x) | 5.2 | 4.5 | 3.5 | 2.8 | ||||||
| Liquidity and financial flexibility | ||||||||||
| Unrestricted reserves ($000s) | 1,664,383 | 1,446,359 | 1,189,946 | 392,654 | ||||||
| Unrestricted days' cash on hand | 377.8 | 360.2 | 294.0 | 243.0 | ||||||
| Unrestricted reserves/total long-term debt (%) | 382.9 | 314.2 | 203.1 | 209.0 | ||||||
| Unrestricted reserves/contingent liabilities (%)* | 2,013.6 | 1,590.7 | 882.0 | 1,006.9 | ||||||
| Average age of plant (years) | 11.2 | 11.2 | 10.9 | 12.7 | ||||||
| Capital expenditures/depreciation and amortization (%) | 170.8 | 132.2 | 101.8 | 126.4 | ||||||
| Debt and liabilities | ||||||||||
| Total long-term debt ($000s) | 447,426 | 447,426 | 671,876 | 188,405 | ||||||
| Long-term debt/capitalization (%) | 16.9 | 18.1 | 25.2 | 25.4 | ||||||
| Contingent liabilities ($000s)* | 80,000 | 77,600 | 163,385 | 51,450 | ||||||
| Contingent liabilities/total long-term debt (%)* | 27.2 | 16.8 | 22.0 | 25.1 | ||||||
| Debt burden (%) | 1.8 | 1.9 | 2.4 | 2.4 | ||||||
| Defined-benefit plan funded status (%)* | 102.0 | 98.3 | N/A | 93.2 | ||||||
| Miscellaneous | ||||||||||
| Salaries & benefits/NPR (%) | 63.1 | 61.1 | 60.2 | 57.4 | ||||||
| Nonoperating revenue/total revenue (%) | 4.1 | 3.0 | 2.1 | 2.0 | ||||||
| Cushion ratio (x) | 57.6 | 43.3 | 34.0 | 28.3 | ||||||
| Days in accounts receivable | 57.1 | 52.4 | 62.0 | 47.0 | ||||||
| Cash flow/total liabilities (%) | 23.5 | 18.6 | 14.8 | 14.8 | ||||||
| Pension-adjusted long-term debt/capitalization (%)* | 16.9 | 17.8 | 25.2 | 25.7 | ||||||
| Adjusted operating margin (%)§ | 3.0 | 2.3 | 2.6 | 0.7 | ||||||
| N/A--Not applicable. *These ratios are only for organizations that have defined-benefit pension plans or contingent liabilities. §Adjusted operating margin excludes nonrecurring operating revenues that are largely attributable to stimulus funding, FEMA reimbursement, and 340B settlement funding, but could comprise other nonrecurring items. | ||||||||||
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 audited financial statements used for medians and in our analysis include both obligated and nonobligated group members. For the medians, unrestricted reserves exclude Medicare advance payments, and total operating revenue includes all recognized stimulus funding, Federal Emergency Management Agency reimbursement, and 340B settlement funding.
Related Research
- U.S. Not-For-Profit Acute Health Care 2023 Medians: Remarkably Level With Prior Year, But Performance Remains Notably Below Historical Norms, Aug. 7, 2024
- U.S. Not-For-Profit Health Care Stand-Alone Hospital Median Financial Ratios--2023, Aug. 7, 2024
- U.S. Not-For-Profit Health Care System Median Financial Ratios--2023, Aug. 7, 2024
- U.S. Not-For-Profit Acute Health Care Speculative-Grade Median Financial Ratios--2023, Aug. 7, 2024
- U.S. Not-For-Profit Health Care Small Stand-Alone Hospital Median Financial Ratios--2023, Aug. 7, 2024
- U.S. Not-For-Profit Health Care Outstanding Ratings And Outlooks As Of June 30, 2024, July 18, 2024
- Preliminary 2023 Medians For U.S. Acute Health Care Providers Indicate Continued Operating Pressures For Many, April 30, 2024
- U.S. Not-For-Profit Acute Health Care Rating Actions, 2023 Year-End Review, Feb. 8, 2024
- U.S. Not-For-Profit Acute Health Care Providers 2024 Outlook: Historical Peak Of Negative Outlooks Signals Ongoing Challenges, Dec. 6, 2023
Glossary
- Glossary: Not-For-Profit Health Care Organization Ratios, March 19, 2018
Quarterly rating actions
- U.S. Not-For-Profit Health Care Rating Actions, June And Second Quarter 2024, July 12, 2024
- U.S. Not-For-Profit Health Care Rating Actions, March 2024, April 15, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Kay Sifferman, Austin +1 (346) 282 3264; kay.sifferman@spglobal.com |
| Khushi Sutaria, New York + 1 (903) 864 0645; khushi.sutaria@spglobal.com | |
| Secondary Contacts: | Stephen Infranco, New York + 1 (212) 438 2025; stephen.infranco@spglobal.com |
| Suzie R Desai, Chicago + 1 (312) 233 7046; suzie.desai@spglobal.com | |
| Research Contributors: | Shrutika Joshi, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
| Akul Patel, CRISIL Global Analytical Center, an S&P affiliate, Mumbai | |
| Kunal Salunke, CRISIL Global Analytical Center, an S&P affiliate, Mumbai | |
| Additional Contact: | Chloe A Pickett, Englewood + 1 (303) 721 4122; Chloe.Pickett@spglobal.com |
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