This report does not constitute a rating action.
Hospitals' financial needs are among the most significant challenges for Swiss cantons. Several Swiss cantonal hospitals recently encountered financial difficulties due to rising costs, infrequent tariff adjustments, and significant investment needs. These factors weakened hospitals' profitability and capital ratios and led to operational challenges and limited investment capacity. Several rated cantons reacted by injecting capital, increasing ongoing transfers, and attempting to merge hospitals.
Chart 1
What's Happening
Recent developments highlighted the pressure on cantonal hospitals, with some facing insolvency, unless regional governments provide funding. Several cantons took initiatives to support their hospitals, including consolidations and the closure of smaller facilities. Others were recapitalized, for example, the cantonal hospitals of Aarau and St. Gallen in 2023, with a capital injection of 240 million Swiss francs (CHF) and the conversion of CHF162 million of loans into equity, respectively. In the latter case, the canton also granted a CHF100 million loan for the expansion of its hospital in Grabs.
Even hospitals that are not canton-owned but considered important due to their specialized services or strategic location could receive financial support from local governments. For example, the canton of Zurich allocated CHF85 million to the Zurich Children's Hospital. This was despite the fact that the canton has no legal obligation to do so and that the hospital is a non-profit private institution.
Why It Matters
Cantonal hospitals' financial stability represents a contingent liability that could exert pressure on canton ratings if it materializes. Most rated Swiss cantons are of the highest credit quality, often at the 'AAA' rating level. Their currently robust liquidity positions and recent years' fiscal results provided some resilience and, so far, enabled cantons to support their hospitals without significant concerns. However, cantonal hospitals' medium-term financial sustainability represents a sector-wide challenge that could exert pressure on selected canton ratings via:
- The need for ongoing operating transfers: Weak hospital profitability often necessitates higher ongoing transfers from cantons. The primary causes of this weak profitability are rising cost for staff and treatment, as well as tariff adjustments below cost inflation. Tariff increases could help hospitals cover their costs but would also raise cantons' operating expenditures, which already cover at least 55% of inpatient care costs. Furthermore, tariff adjustments cannot be decided unilaterally by cantons.
- Potential recapitalizations: Hospitals with weak capital ratios have insufficient equity relative to their debt, which renders them more susceptible to financial instability. This can constrain their capacity to borrow additional funds for capital expenditure projects. Considering their weak profitability, these hospitals are at risk of asset re-evaluations, which could erode their equity capital further and necessitate recapitalizations to restore financial viability.
- Higher cantonal debt and contingent liabilities: Switzerland's demographic trend suggests generally higher demand for healthcare services. This will likely require additional infrastructure investments, even if hospitals try to reduce per-case spending. If hospitals source financing for such investments in the market, contingent liability volumes for hospital-owning cantons would increase. If funding is obtained via on-lending from cantonal budgets, cantons' direct debt could increase meaningfully.
What Comes Next
Cantons whose hospitals have low profitability and low equity ratios could come under pressure over the near term. Improvements in hospitals' operational performance are fiscally most beneficial for cantons but also most difficult to achieve. Yet increased operating transfers can weigh on budgetary performance, while equity contributions could increase cantonal debt.
A single event is unlikely to affect our ratings. That said, repeated--or isolated but very significant--financial support for cantonal hospitals could materially affect our canton ratings or result in a reassessment of our view of cantons' financial management.
Related Research
- Institutional Framework Assessment: Swiss Cantons Benefit From Autonomy And Robust Checks And Balances, May 23, 2023
| Primary Credit Analysts: | Didre Schneider, Frankfurt +49 69 33 999 244; didre.schneider@spglobal.com |
| Michael Stroschein, Frankfurt + 49 693 399 9251; michael.stroschein@spglobal.com | |
| Research Contributor: | Paula Enriquez, Frankfurt; paula.enriquez@spglobal.com |
| Additional Contact: | Sovereign and IPF EMEA; SOVIPF@spglobal.com |
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