Rating And Outlook Overview
Small hospitals, defined as having $150 million or less of total operating revenue, are a subset of stand-alone hospitals. The limited number of small hospitals creates some difficulty in drawing conclusions from median trends, particularly as this cohort of providers has generally higher volatility than other larger and more diversified health care providers. There were 19 providers included in S&P Global Ratings' small hospital median calculations, down from 26 two years ago. The decrease is due to some providers increasing total operating revenue beyond $150 million, as well as some acquisition activity.
The ratings distribution for small hospitals continues to skew toward speculative-grade. Ongoing high labor costs and inflationary pressures continued to affect small hospitals and have contributed to downgrades, especially when combined with reductions in liquidity and financial flexibility. A greater percentage of small hospitals are rated in lower rating categories compared with stand-alone hospitals, with no small hospitals garnering a rating above the 'A' category. This is consistent with historical rating distribution trends, given the inherent risks associated with small hospitals, including less operating diversity and flexibility, small medical staff sizes, and limited service area and economic growth characteristics, all lending to increased volatility.
More small hospitals carry a negative outlook. Industry performance pressure and generally weakened financial results have led to more small hospitals carrying negative outlooks this year (37%) than in the previous year (23%). Small hospitals have historically held an elevated proportion of nonstable outlooks compared with stand-alone hospitals due to the aforementioned inherent risks, which can lead to more rapid financial deterioration than larger providers and typically longer recovery periods.
The small hospitals we rate are diverse. Although the number of providers is limited, there are a variety of hospital types in this cohort, including specialty hospitals, tax-supported hospital districts, and critical access hospitals. The cohort is also geographically broad, representing 14 states, with many located in rural locations. This diversity within such a small sample size also might contribute to some median volatility year-to-year.
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Key Median Takeaways
Profitability metrics continue to fall from prior years. Small hospitals in the 'A' and speculative-grade categories experienced continued margin decline in 2023, though the magnitude was much more pronounced for speculative-grade providers. The decrease was predominantly due to continued labor and inflationary pressures, with smaller providers less likely to be able to secure material reimbursement increases to offset the higher costs, given their size and payor mix. Nevertheless, several small hospitals are designated critical access hospitals, resulting in cost-based reimbursement for Medicare, and often Medicaid, which helps counter some expense inflation. Of note, 'BBB' category providers saw sound performance improvement in 2023, particularly when assessing adjusted operating margin, and small hospitals in both the 'A' and 'BBB' categories performed on par with, or better than, the corresponding stand-alone hospital medians.
Unrestricted reserves remain comparatively sound, mostly stable for investment-grade. Small hospital unrestricted reserve and balance-sheet medians were stronger than those of stand-alone hospitals, as small hospitals typically must hold a materially stronger cushion of unrestricted reserves and liquidity metrics to carry a comparable rating. This reflects the need to offset their inherent risks and vulnerabilities. That said, days' cash on hand dropped across all rating categories for small hospitals, reflecting rising expense pressure. At the same time, unrestricted reserves to debt increased for 'A' and 'BBB' rated providers but decreased in the speculative-grade category, concurrent with an increase in leverage for that group.
Debt metrics improved slightly for investment-grade providers and worsened for speculative-grade ones. Small hospitals experienced varying shifts in long-term debt, which is partly reflective of changes in the sample size. Long-term debt to capitalization and debt burden improved or held stable in the 'A' and 'BBB' rating categories, while worsening in the speculative-grade category. The small sample size results in varied defined-benefit pension plan funded statuses across categories, though this measure markedly worsens for speculative-grade providers, given more stressed cash contributions.
Labor costs remain a pressure point across all rating categories. Salaries and benefits as a percentage of net patient revenue for small hospitals increased in all rating categories, but most significantly for speculative-grade providers, reaching 66% in 2023. This measure drew closer to that of stand-alone counterparts in the 'A' and 'BBB' categories, but again worsened to a larger margin in the speculative-grade category. The increase is due to the ongoing labor shortages across the sector, coupled with more limited options related to raising reimbursement. Providers have focused on recruitment and retention efforts in the past few years, which have resulted in higher salary costs.
Table 1
| U.S. not-for-profit small hospital medians by rating category -- 2023 vs. 2022 vs. 2021 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| A | BBB | Speculative-grade | ||||||||||||||||||
| Fiscal year | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | |||||||||||
| Sample size | 5 | 7 | 7 | 8 | 7 | 8 | 6 | 6 | 11 | |||||||||||
| Financial performance | ||||||||||||||||||||
| Net patient revenue (NPR) ($000s) | 122,104 | 123,641 | 113,095 | 94,374 | 67,367 | 88,200 | 93,028 | 90,705 | 85,594 | |||||||||||
| Total operating revenue ($000s) | 130,002 | 132,476 | 119,700 | 105,801 | 73,289 | 95,983 | 96,440 | 96,271 | 97,747 | |||||||||||
| Total operating expenses ($000s) | 130,037 | 124,217 | 112,558 | 102,708 | 72,449 | 92,271 | 99,894 | 92,481 | 99,361 | |||||||||||
| Operating income ($000s) | 1,259 | 4,686 | 6,411 | 1,288 | (381) | 3,581 | (2,446) | 2,234 | 5,260 | |||||||||||
| Operating margin (%) | 0.9 | 3.5 | 5.8 | 0.9 | (0.5) | 2.9 | (6.3) | 3.2 | 5.1 | |||||||||||
| Net nonoperating income ($000s) | 4,657 | 2,711 | 2,902 | 4,747 | 1,918 | 3,292 | 2,279 | 2,312 | 449 | |||||||||||
| Excess income ($000s) | 5,916 | 9,002 | 17,114 | 5,508 | 2,627 | 6,812 | (1,451) | 2,926 | 5,582 | |||||||||||
| Excess margin (%) | 4.2 | 9.1 | 7.9 | 6.9 | 2.3 | 6.3 | (3.6) | 5.1 | 5.9 | |||||||||||
| Operating EBIDA margin (%) | 6.7 | 10.4 | 11.8 | 7.1 | 6.2 | 10.6 | 3.0 | 11.7 | 13.3 | |||||||||||
| EBIDA margin (%) | 9.7 | 16.8 | 15.3 | 11.2 | 7.3 | 12.4 | 5.5 | 13.9 | 13.9 | |||||||||||
| Net available for debt service ($000s) | 13,747 | 17,076 | 18,999 | 11,648 | 10,490 | 11,536 | 4,132 | 7,466 | 12,951 | |||||||||||
| Maximum annual debt service ($000s) | 3,642 | 3,647 | 3,647 | 2,509 | 2,487 | 2,844 | 4,929 | 3,877 | 2,775 | |||||||||||
| Maximum annual debt service coverage (x) | 6.2 | 5.9 | 7.3 | 4.3 | 1.4 | 3.1 | 0.7 | 3.2 | 2.9 | |||||||||||
| Operating lease-adjusted coverage (x) | 6.1 | 5.5 | 5.5 | 4.1 | 1.3 | 3.0 | 0.7 | 2.9 | 2.9 | |||||||||||
| Liquidity and financial flexibility | ||||||||||||||||||||
| Unrestricted reserves ($000s) | 99,599 | 115,533 | 106,848 | 69,873 | 58,041 | 63,908 | 35,725 | 30,754 | 38,802 | |||||||||||
| Unrestricted days' cash on hand | 467.5 | 480.5 | 520.1 | 321.1 | 339.3 | 303.4 | 124.0 | 131.5 | 151.4 | |||||||||||
| Unrestricted reserves/total long-term debt (%) | 560.4 | 375.1 | 393.0 | 191.7 | 181.8 | 188.6 | 70.7 | 95.7 | 100.6 | |||||||||||
| Unrestricted reserves/contingent liabilities (%)* | 1,712.0 | 1,495.8 | 613.1 | 1,009.5 | 926.1 | 911.9 | 142.7 | 504.0 | 480.8 | |||||||||||
| Average age of plant (years) | 13.2 | 13.9 | 13.9 | 16.6 | 13.1 | 14.4 | 12.2 | 13.0 | 13.9 | |||||||||||
| Capital expenditures/depreciation and amortization (%) | 75.4 | 59.8 | 58.2 | 120.1 | 157.7 | 98.9 | 165.2 | 126.5 | 76.8 | |||||||||||
| Debt and liabilities | ||||||||||||||||||||
| Total long-term debt ($000s) | 21,968 | 43,682 | 46,362 | 21,437 | 25,326 | 39,301 | 47,201 | 39,535 | 27,889 | |||||||||||
| Long-term debt/capitalization (%) | 12.4 | 16.1 | 16.1 | 21.4 | 31.7 | 27.3 | 39.9 | 33.1 | 35.3 | |||||||||||
| Contingent liabilities ($000s)* | 7,510 | 10,953 | 33,780 | 19,370 | 29,335 | 15,569 | 18,473 | 10,275 | 2,265 | |||||||||||
| Contingent liabilities/total long-term debt (%)* | 65.4 | 25.1 | 54.4 | 59.6 | 19.6 | 39.2 | 52.2 | 28.2 | 22.1 | |||||||||||
| Debt burden (%) | 2.8 | 2.6 | 2.8 | 3.1 | 3.6 | 3.7 | 5.0 | 3.5 | 3.4 | |||||||||||
| Defined-benefit plan funded status (%)* | N/A | N/A | 101.7 | 106.5 | 119.3 | 105.3 | 49.9 | 83.6 | 62.3 | |||||||||||
| Miscellaneous | ||||||||||||||||||||
| Salaries & benefits/NPR (%) | 58.9 | 57.7 | 59.1 | 60.0 | 57.1 | 60.2 | 66.0 | 58.9 | 58.2 | |||||||||||
| Nonoperating revenue/total revenue (%) | 3.4 | 1.9 | 2.7 | 3.5 | 2.4 | 2.9 | 3.6 | 3.1 | 0.5 | |||||||||||
| Cushion ratio (x) | 40.9 | 40.1 | 39.9 | 25.2 | 27.6 | 23.6 | 6.7 | 9.5 | 8.7 | |||||||||||
| Days in accounts receivable | 52.3 | 54.0 | 61.6 | 50.1 | 49.8 | 50.6 | 53.0 | 59.7 | 43.0 | |||||||||||
| Cash flow/total liabilities (%) | 29.4 | 31.3 | 25.2 | 22.4 | 5.2 | 20.1 | 3.1 | 15.6 | 14.4 | |||||||||||
| Pension-adjusted long-term debt/capitalization (%)* | 12.4 | 16.1 | 16.1 | 20.9 | 31.7 | 27.5 | 40.6 | 33.7 | 35.3 | |||||||||||
| Adjusted operating margin (%)§ | 0.9 | 1.6 | 3.1 | 0.7 | (2.6) | 0.0 | (7.8) | 2.7 | 3.3 | |||||||||||
| 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 small hospital medians vs. stand-alone medians by rating category -- 2023 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| A | BBB | Speculative-grade | ||||||||||||
| Small | Stand-alone | Small | Stand-alone | Small | Stand-alone | |||||||||
| Sample size | 5 | 92 | 8 | 61 | 6 | 27 | ||||||||
| Financial performance | ||||||||||||||
| Net patient revenue (NPR) ($000s) | 122,104 | 572,363 | 94,374 | 406,053 | 93,028 | 317,835 | ||||||||
| Total operating revenue ($000s) | 130,002 | 608,974 | 105,801 | 434,090 | 96,440 | 350,038 | ||||||||
| Total operating expenses ($000s) | 130,037 | 578,536 | 102,708 | 443,346 | 99,894 | 370,024 | ||||||||
| Operating income ($000s) | 1,259 | 4,396 | 1,288 | (4,737) | (2,446) | (13,870) | ||||||||
| Operating margin (%) | 0.9 | 0.9 | 0.9 | (1.0) | (6.3) | (3.8) | ||||||||
| Net nonoperating income ($000s) | 4,657 | 11,900 | 4,747 | 7,153 | 2,279 | 4,168 | ||||||||
| Excess income ($000s) | 5,916 | 13,388 | 5,508 | 1,063 | (1,451) | (8,533) | ||||||||
| Excess margin (%) | 4.2 | 3.3 | 6.9 | 0.3 | (3.6) | (2.0) | ||||||||
| Operating EBIDA margin (%) | 6.7 | 6.6 | 7.1 | 4.9 | 3.0 | 1.7 | ||||||||
| EBIDA margin (%) | 9.7 | 8.9 | 11.2 | 6.2 | 5.5 | 2.7 | ||||||||
| Net available for debt service ($000s) | 13,747 | 44,676 | 11,648 | 23,117 | 4,132 | 11,058 | ||||||||
| Maximum annual debt service ($000s) | 3,642 | 15,231 | 2,509 | 11,864 | 4,929 | 8,046 | ||||||||
| Maximum annual debt service coverage (x) | 6.2 | 3.6 | 4.3 | 2.4 | 0.7 | 1.0 | ||||||||
| Operating lease-adjusted coverage (x) | 6.1 | 2.8 | 4.1 | 1.9 | 0.7 | 1.0 | ||||||||
| Liquidity and financial flexibility | ||||||||||||||
| Unrestricted reserves ($000s) | 99,599 | 392,654 | 69,873 | 175,149 | 35,725 | 64,638 | ||||||||
| Unrestricted days' cash on hand | 467.5 | 243.0 | 321.1 | 133.0 | 124.0 | 75.5 | ||||||||
| Unrestricted reserves/total long-term debt (%) | 560.4 | 209.0 | 191.7 | 142.9 | 70.7 | 63.8 | ||||||||
| Unrestricted reserves/contingent liabilities (%)* | 1,712.0 | 1,006.9 | 1,009.5 | 668.9 | 142.7 | 323.5 | ||||||||
| Average age of plant (years) | 13.2 | 12.7 | 16.6 | 13.3 | 12.2 | 14.8 | ||||||||
| Capital expenditures/depreciation and amortization (%) | 75.4 | 126.4 | 120.1 | 96.1 | 165.2 | 108.9 | ||||||||
| Debt and liabilities | ||||||||||||||
| Total long-term debt ($000s) | 21,968 | 188,405 | 21,437 | 122,599 | 47,201 | 98,599 | ||||||||
| Long-term debt/capitalization (%) | 12.4 | 25.4 | 21.4 | 33.4 | 39.9 | 52.4 | ||||||||
| Contingent liabilities ($000s)* | 7,510 | 51,450 | 19,370 | 29,055 | 18,473 | 22,336 | ||||||||
| Contingent liabilities/total long-term debt (%)* | 65.4 | 25.1 | 59.6 | 19.3 | 52.2 | 16.3 | ||||||||
| Debt burden (%) | 2.8 | 2.4 | 3.1 | 2.4 | 5.0 | 2.7 | ||||||||
| Defined-benefit plan funded status (%)* | N/A | 93.2 | 106.5 | 92.8 | 49.9 | 90.8 | ||||||||
| Miscellaneous | ||||||||||||||
| Salaries & benefits/NPR (%) | 58.9 | 57.4 | 60.0 | 58.5 | 66.0 | 58.0 | ||||||||
| Nonoperating revenue/total revenue (%) | 3.4 | 2.0 | 3.5 | 1.4 | 3.6 | 1.2 | ||||||||
| Cushion ratio (x) | 40.9 | 28.3 | 25.2 | 15.2 | 6.7 | 6.7 | ||||||||
| Days in accounts receivable | 52.3 | 47.0 | 50.1 | 47.7 | 53.0 | 46.4 | ||||||||
| Cash flow/total liabilities (%) | 29.4 | 14.8 | 22.4 | 8.9 | 3.1 | 2.4 | ||||||||
| Pension-adjusted long-term debt/capitalization (%)* | 12.4 | 25.7 | 20.9 | 34.1 | 40.6 | 54.7 | ||||||||
| Adjusted operating margin (%)§ | 0.9 | 0.7 | 0.7 | (1.3) | (7.8) | (3.9) | ||||||||
| 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 Health Care Children’s Hospital 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 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: | David Mares, Englewood + 1 (303) 912 9416; david.mares@spglobal.com |
| Patrick Zagar, Dallas + 1 (214) 765 5883; patrick.zagar@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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