The U.S. not-for-profit higher education and health care sectors frequently intersect, given the connections between universities and their associated AMCs and health care operations. AMCs play a key role in these sectors as providers of education, research, and advanced clinical care. From a credit perspective, many of these institutions are rated high investment-grade, reflecting significant breadth of services, as well as benefits derived from state and federal funding for education and research, and healthy balance sheets, in part from philanthropy. However, both sectors face headwinds new and old, and S&P Global Ratings believes it is helpful to explore the credit drivers and relevant trends for organizations with overlapping exposures.

For 2025, our sector outlook on not-for profit higher education is bifurcated, though most universities with AMC relationships are rated at the higher end of the ratings scale and are on better credit footing.   Some colleges and universities are demonstrating stability or improvement in their overall credit characteristics while others are facing pressure from falling enrollment or weakening financial operations (see "U.S. Not-For-Profit Higher Education Outlook 2025: The Credit Quality Divide Widens," published Dec. 5, 2024, on RatingsDirect). Pressure on credit quality is most evident at the lower end of the ratings scale, where entities are mainly smaller colleges and universities with less financial flexibility and a more regional, limited draw for students.

In contrast, most of the higher-rated schools ('AA' category and above) enjoy relative rating stability due to strong student demand and national reach, significant balance-sheet flexibility, and healthy financial operations. The majority of the colleges and universities with AMCs or health care exposure carry high investment-grade ratings and benefit from experienced and well-qualified management teams, sound financial operations and resources, and diversified revenues that encompass tuition, health care operations, and research funding.

Given evolving federal policies under the new administration in Washington, D.C., in our view, risks to funding for schools with significant research and health care endeavors have heightened with the possibility of funding cuts. The majority of the 146 R1 universities (those with very high research spending and doctorate production) we rate hold solid financial positions, with significant liquidity and flexibility to face short-term funding disruptions. Considering fiscal 2025 ends in three months, we don't anticipate seeing material financial impacts until fiscal 2026 and beyond.

In 2025, our sector view for not-for-profit health care is stable, but the current operating and administrative/legislative environment creates uncertainty.   Our sector view for 2025 is now stable, albeit with some risks and unpredictability, including uneven recovery and administrative/legislative uncertainty (see "U.S. Not-For-Profit Acute Health Care 2025 Outlook: Stable But Shaky For Many Amid Uneven Recovery And Regulatory Challenges," published Dec. 4, 2024). Lower-rated entities typically face the most credit pressure, as their financial flexibility is often constrained. Higher-rated health care organizations, including many hospitals and health systems with an academic affiliation are starting to stabilize or improve performance and generally have good financial flexibility, but still face the same labor and inflationary expense pressures as lower-rated issuers. Furthermore, AMCs generally also have quite healthy market positions because they're often the sole provider of quaternary and tertiary services for a large service area and often act as safety net providers in various markets.

That said, in addition to the research cuts mentioned that could also affect AMCs, recent discussions have taken place at the federal level around potential Medicaid cuts. While there are no specifics yet, this could be a credit factor for many rated organizations in the acute health care sector, depending on Medicaid payer exposure. This risk could be heightened for AMCs, many of which also act as safety net providers in communities and generally have a higher Medicaid payer mix.

What We're Watching

Federal and regulatory policy under the new administration elevates the risk of payment cuts.   Governmental payers, including Medicare and Medicaid, represent a sizable portion of revenues for many AMCs. Since January, regulatory and legislative bodies have stepped up their focus on potentially reducing the federal portion of payments related to Medicaid, to support the extension of federal tax cuts later this year. The specifics aren't available yet, but various proposals and discussions have suggested payment cuts, reduced coverage, and changes to payment methodology, all of which could materially affect cash flow for AMCs.

Many AMCs also receive meaningful supplemental funds and disproportionate share funds, with the latter scheduled to be cut beginning October 2025, unless Congress delays it again. Although Medicare has not been the focus of recent legislative and regulatory discussion, we expect the federal government will continue to look for ways to slow the growth of Medicare costs, given Medicare remains a large part of the federal budget. Such a curb on Medicare costs also could pressure AMCs' (and many other health care providers') cash flow over time.

Federal research funding might shrink.   Cuts to research funding at both universities and hospitals could require AMCs to consider other supplemental sources of funding. A proposed change that could cap indirect cost recovery rates at 15% for grants from the National Institutes of Health would lead to a reduction in revenue for these organizations, as previously negotiated rates are typically between 30% and 70%. Furthermore, federal money is the primary source for research funding, with some amounts also coming from states and local sources, philanthropy, internal cash flow, endowment income, and other organizations. Management teams are assessing the potential effects of federal cuts and the budget options to offset their impact.

We believe that most universities and AMCs have adequate reserves to provide flexibility should material funding cuts transpire, especially as they could be phased in over several years. However, should federal reimbursement change, it's likely that some cuts in research programs would be necessary.

Expense pressures for universities with AMCs may be two-fold.   In general, hospitals and universities continue to face rising expense pressures generally tied to labor and other inflationary pressures, and those universities with health care operations can be exposed on multiple fronts. Recent issues have contributed to additional stress across both the higher education and health care sectors, which could strain the AMCs, which typically carry a higher expense structure due to costs associated with education and training. As universities address rising operating expenses, required academic support transfers from their hospital partners may escalate to support their university affiliate; however, this is also coming at a time when hospitals are similarly trying to manage their expenses and stabilize their cash flow.

Diversification into community hospitals helps with access but could create other financial pressures.   AMCs are expanding their acute care presence to community hospitals to provide lower-cost sites of care and increase referral sources for higher acuity business along with managing demand, which has been high, at the flagship academic hospitals. This could dampen operating performance as expense bases increase and potential merger-related expenditures and overall capital needs lead to negative balance-sheet results.

Labor and physician shortages and unionization are ongoing issues.   Labor shortages and recruitment and retention problems with staff and physicians continue to pressure expenses. In addition, increasing unionization of residents and employees could further strain operating results. Health care providers, including AMCs, have focused on training, recruitment, and retention, but we expect staffing will remain a challenge for the next several years.

Capital investment remains high for both sectors.   Universities continue to address deferred maintenance and significant capital projects, including energy infrastructure, programmatic expansions, and residential housing options. In general, health care is also highly capital intensive and systems strive to remain competitive and keep up with technology and evolving clinical standards. These capital and operating investments in plant and technology are substantial and with recent rising inflation and interest rates, the ability to invest also becomes more expensive. Although some organizations meet these needs with philanthropy, in many cases capital demands lead to debt issuances and expense bases greater than those for universities without health care exposure.

Faculty practice plans need support.   Faculty physicians are a key resource and benefit for both the hospital (clinical providers) and medical school (educators and researchers). These practices can be on the books of either the hospital or medical school or, less often, can be independent, but typically require financial support from the hospital.

Credit Fundamentals For Higher Education Institutions With Health Care Exposure

S&P Global Ratings rates several U.S. public and private colleges and universities that have, or are affiliated with, substantial health care operations. They typically operate sizable medical schools, conduct innovative research, and may own or be affiliated with hospitals and health systems that often serve regional or national markets owing to the breadth and complexity of their services. It's not uncommon for these universities to derive 40%-70% of total revenue from health care-related operations and research, which diversifies revenues and can mitigate risk. At the same time, most of these universities also benefit from excellent demand, strong fundraising capabilities, and sizable endowments. Therefore, almost 90% of higher education issuers with health care exposure are rated in the 'A' category or higher.

For higher education institutions, exposure to health care-associated operating stress can have varying impacts on the rating on the university. Under S&P Global Ratings' higher education criteria, the impacts generally depend on how much of the institution's overall revenues are health care driven, how successfully the institution mitigates current expense pressures, and how it manages its balance-sheet strength.

Variables we consider in our higher education ratings criteria and methodology

• Generally, we view industry risks in the health care sector as higher than those in the higher education sector. We incorporate the higher industry risk into our ratings, if warranted, to reflect significant health care revenue exposure.
• We also reflect our assessment of management and governance abilities relative to the complex organizations they oversee.
• If the revenue base is concentrated in health care, the financial risk profile could be weakened, while diversified revenue--spread across research, health care, and tuition--could improve the financial profile assessment.
• Finally, if there are significant capital needs that will affect financial resources or debt, this factor could affect the financial risk profile as well.

Incorporating Strong Academic Relationships Into Organizations Rated Under Health Care Criteria

Hospitals and health care systems that have strong academic relationships are typically market leaders, although this varies market to market depending on competition, and are often the sole (or one a handful of) providers of complex tertiary and quaternary clinical services for broad regional markets. Typically, the acute care providers make transfers, often substantial, to the school to support faculty recruitment, research, and expenses related to shared strategic and clinical goals.

While not immune to many of the current industry pressures, these facilities hold heightened importance, both in the market because of the specialized services they offer and for their related medical schools because they're frequently the sole clinical teaching site for those institutions. Thus, we rate many AMCs higher than non-AMC providers. These entities, however, do carry higher costs for a variety of reasons including their education mission and research support, but to date have generally been able to manage with additional supplemental revenues and good balance sheets.

In addition, for many health care providers, the academic relationship can offer other benefits such as integrated strategy, collaborative focus on quality, back-office synergies including joint investment management, greater philanthropy, strong physician relationships with the faculty that often provide key clinical services, and joint branding. Our ratings reflect these advantages through a one-notch positive adjustment under our criteria and we have applied this to almost one-quarter of rated AMCs that are affiliated with a higher-rated university.

How We Assess The Credit Quality Of AMCs

There are a wide variety of legal structures and organizational configurations across AMCs. S&P Global Ratings' criteria for determining ratings on organizations considered hybrid with higher education and health care components are typically driven by the mission and characteristics of the organization, as well as the structure of the debt and security. While an entity's revenue base might be primarily health care related, we might assess the organization under our education criteria if, in our view, the mission focus is fundamentally training and teaching. The entity's strategic plan, programmatic priorities, and capital spending approach all may influence which criteria we use to rate the organization.

We typically see a few different structures when rating AMCs, although the following is not a complete list.

Independent higher education and acute health care entities rated separately under the two different criteria.   In these instances, higher education and acute health care organizations remain separate from a governance perspective, and neither entity formally reports to the other one. There may be some overlap for board representation, sharing of strategic plans, brand recognition, and joint fundraising. As with most AMCs, there are typically transfer payments or expenses, generally from the hospital to the university, and possibly other support payments. In these instances, the organizations work together through academic affiliation agreements or other similar type of contracts. Furthermore, the acute health care organization may be a system in which only some of its hospitals are part of the academic affiliation. Examples of these separately rated entities are:

• Vanderbilt University and Vanderbilt Health System;
• Northwestern University and Northwestern Medicine;
• Harvard University and Mass General Brigham;
• Washington University in St. Louis and BJC Health System; and
• University of Cincinnati and UC Health.

Consolidated higher education and health care entities where ratings are assigned using one methodology.   In these cases, debt is issued by either the university or the acute health care organization but there is generally one security pledge and so we would typically rate debt under either our higher education or not-for-profit acute health care criteria, depending on the items included in the opening paragraph of this section. Debt and capital needs, along with other strategic decisions for the entire system, are managed more tightly through one governance structure with a more streamlined approach. Examples of these rated entities are:

• University of Michigan;
• Ohio State University;
• University of Kentucky;
• Oregon Health & Science University; and
• Rush University System for Health.

Consolidated higher education and health care entities with shared governance and use of both criteria.   Generally in these instances, there is one governing or "parent" board that ultimately is responsible for all the entities within an organization. But in many cases, the debt issued is secured separately either by the university or the health care entity and each entity may have its own separate management and board (although there can be integrated leadership with the dean of the medical school also serving as the chief executive officer of the hospital). The individual entity's board or management may also have direct or indirect reporting to the parent board of the consolidated institution. These structures still allow operational synergies and shared resources, and financial transfers and payments are often made between the schools and hospitals. When appropriate, we review the individual university and health care entity and their finances and obligations separately. That said, we recognize the important relationship between the two entities, as well as the associated benefits and risks, and incorporate these factors into our ratings on each of the entities through the respective criteria. Examples of these types of rated entities are:

• Duke University and Duke University Health System;
• New York University and NYU Langone Hospitals;
• Temple University and Temple Health System;
• Stanford University and Stanford Health Care/Stanford Children's Health; and
• University of North Carolina and UNC Health.

Organizations that serve as training sites for medical schools typically rated under health care criteria.   Finally, many hospitals serve as training sites for medical schools, purely through contractual arrangements or through ownership of their own medical schools. In these cases, the academic mission is strategically important, for example, for recruitment, but in many other cases, the education component of the organization is a small portion of the credit profile, as these organizations are frequently part of a larger, multihospital system that often owns community nonteaching hospitals and other diversified companies. Examples of these types of rated entities are:

• Corewell Health;
• Harris Health System;
• Endeavor Health; and
• Hackensack Meridian Health.

Related Research

• U.S. Not-For-Profit Acute Health Care Rating Actions, 2024 Year-End Review, Feb. 5, 2025
• U.S. Higher Education Rating Actions, 2024, Jan. 23, 2025
• U.S. Not-For-Profit Health Care Outstanding Ratings and Outlooks as of Dec. 31, 2024, Jan. 10, 2025
• U.S. Not-For-Profit Higher Education Outlook 2025: The Credit Quality Divide Widens, Dec. 5, 2024
• U.S. Not-For-Profit Acute Health Care 2025 Outlook: Stable But Shaky For Many Amid Uneven Recovery And Regulatory Challenges, Dec. 4, 2024