u.s. not-for-profit health care sector's year-end review indicates pressures from 2014 keep the...
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8/10/2019 U.S. Not-For-Profit Health Care Sector's Year-End Review Indicates Pressures From 2014 Keep The Outlook Negative
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U.S. Not-For-Profit Health Care Sector's Year-EndReview Indicates Pressures From 2014 Keep TheOutlook Negative
Downgrades slightly exceeded upgrades in 2014 for the second consecutive year in the U.S. not-for-profit health care
sector in a trend that is likely to continue in 2015 (see charts 1 and 2). The negative trend is even more pronounced
when excluding ratings that were raised due solely to the benefits of mergers and acquisitions or the impact of our
group rating methodology.
Operating margins were pressured by top-line revenue constraints, soft demand, a movement toward value- and
risk-based payment structures, the impact of reform readiness activities, and the high cost of electronic medical record
implementation and maintenance. While we have seen some relief stemming from the expansion of health insurance
coverage under the Affordable Care Act which improved revenue streams at many hospitals, merger-and-acquisition
(M&A) activity, and strong investment markets in 2014, these forces have not been sufficient to reverse the generally
negative trends driven by revenue and cost pressures.
Overview
Our 2015 outlook for the sector is negative.
There were 46 downgrades compared to 41 upgrades in 2014.
Approximately 60% of the upgrades were due solely to improvement in credit quality, while the remaining
upgrades were related to M&A activity and our group rating methodology.
The percentage of negative outlooks rose from 2013.
Most of our ratings were affirmed with a stable outlook.
Although downgrades outpaced upgrades, most of our ratings were affirmed, which is consistent with historic trends.
In addition, there were several positive rating actions in 2014, many of which were due to mergers and acquisitions.
However, Standard & Poor's Ratings Services believes the operating and financial pressures on not-for-profit hospitals
and health systems will persist in 2015, leading to more downgrades than upgrades for the third year in a row.
Accordingly, our 2015 outlook for the sector remains negative.
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Chart 1
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Chart 2
An Increase In Negative Outlooks
At the end of 2014, 75% of all not-for-profit acute care ratings were in the 'A' and 'BBB' categories (see chart 3), which
is about the same as in 2013, although the number of speculative-grade credits rose one percentage point. Rating
stability in many cases was driven by continued balance-sheet improvement, with strong investment markets, receipt
of meaningful use funds, and provider tax programs all contributing to higher unrestricted reserves. We believe many
hospitals have already received the largest portion of meaningful use proceeds and that these funds will phase out in
the next few years. In our view, the long-term survival of provider tax programs is not assured and will thus need to be
monitored as a credit factor.
About one-third of all credits rated and reviewed in 2014 had either rating or outlook changes. In a reversal of the
trend from 2011 through 2013, positive outlook changes slightly exceeded negative outlook changes on credits with
affirmed ratings (see charts 4 and 5). However, most negative outlook revisions (which included outlooks changing to
stable from positive and to negative from stable) were to negative from stable, indicating a strong likelihood of future
downgrades. Of the positive outlook revisions (which included outlooks changing to stable from negative and to
positive from stable), about one-third were revisions to stable from negative; these changes are not indicative of future
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upgrades. Negative outlooks now total 15% of all outlooks compared with 14% a year earlier. Positive outlooks are
unchanged from 2013 at 8% of all outlooks. Compared with 2013, a slightly lower 77% of ratings carry stable outlooks.
During 2014, we upgraded 41 providers and downgraded 46 for a ratio of 0.9:1 (see tables 1 and 2). This represents a
slight improvement from 0.8:1 in 2013 but is still well below the 1.2:1 ratio in 2012. Approximately one-third of
downgraded credits are now speculative grade. In addition, one-third of downgraded credits continue to carry negativeoutlooks, indicating the likelihood of further rating deterioration. There were no downgrades attributable to M&A or
related activity. With few exceptions, most upgrades occurred within the investment-grade categories.
The primary reason for last year's downgrades, apart from a few exceptions, was weak operating trends as large
volume declines led to operating losses. Other factors included costly technology installations and maintenance and
health reform readiness. Many upgrades were due in part to stronger balance sheets brought on by robust investment
markets, although 16 were due solely to M&A activity and the application of our group methodology rating. These 16
upgrades included nine multinotch rating changes.
Chart 3
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Chart 4
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Chart 5
Higher Ratings Will Be A Challenge For Many Systems
Slightly over half of the upgrades were to or within the 'A' category, which continues to be the highest percentage
rating category for both stand-alone and system providers. About one-quarter of the upgrades occurred within the
'BBB' and speculative-grade categories, including three credits moving to investment grade from speculative grade.
Most of the upgrades affected stand-alone hospitals and were attributable to both improved credit quality as well as
rating uplift resulting from integration into higher-rated systems. While there were upgrades of eight systems, we
believe that systems in general will find it increasingly difficult to achieve a higher rating in the current operating
environment because their ratings are already skewed to the upper portion of the rating scale (see chart 6).
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Chart 6
M&A Activity Masks Drop In Credit Quality
Substantial M&A activity as well as the application of our group rating methodology increased the number of upgrades
but did not contribute toward any downgrades, masking the deterioration of credit quality in the sector. Of the
upgrades, 39% were due to M&A activity. All the downgrades were due to weakening credit quality. In comparing
rating activity due to credit quality alone, there were almost twice as many downgrades as upgrades.
In 2014, stand-alone hospitals accounted for 80% of upgrades and 74% of downgrades. Of the raised stand-alone
ratings, almost half of the changes were due to mergers and acquisitions and group rating methodology. We expect
some of these stand-alone credits would have experienced rating deterioration without rating support derived frombeing part of a larger system, especially as over half of these credits were in the 'BBB' rating category. In addition,
many organizations joined larger organizations last year and subsequently had ratings withdrawn as their debt was
repaid or refinanced. We believe this has also masked what would have been a further decline in credit quality.
Although mergers and acquisitions can offer immediate credit improvement, we believe the trend itself isn't strong
enough to offset the negative impact of the sector's many pressures. In the longer term, we still expect a softer
operating performance.
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Negative Actions Were Skewed Toward Lower-Rated Credits
The downgrades were skewed toward lower-rated credits, with 67% to or within the 'BBB' and speculative-grade
categories, and 33% to or within the 'AA' and 'A' categories. Historically, many of the upgrades and downgrades
occurred in the top and bottom of the rating spectrum, respectively. However, the rating changes are increasinglyoccurring across a broader spectrum, including the 'AA' rating category where 15 credits were downgraded within the
category or to the 'A' category. The downgrades continue to disproportionately affect stand-alone providers although
health systems are not immune, accounting for 26% of 2014's negative rating actions. The downgrades also
disproportionately affected the speculative-grade categories, with one-third of all 2014 downgrades into or within
speculative grade.
Medicaid Expansion Hasn't Yet Affected Ratings
So far, we do not see a correlation between rating changes and individual state participation in the expansion of
Medicaid under the Affordable Care Act. In 2014, providers in expansion states represented slightly over 50% of both
upgrades and downgrades. Although some hospitals posted improved margins that management attributed to
increased Medicaid enrollment, we believe that Medicaid expansion isn't by itself sufficient to fully counter the
negative pressures facing many providers. We believe 2015 will be a more telling year as a larger number of providers
will have had a full year of Medicaid expansion experience.
Expected Impact Of Revised Criteria
Our 2015 rating expectations reflect our view of current credit trends and the operating environment for the health
care industry. These comments exclude the anticipated impact of our revised criteria, which were released Dec. 15,
2014, and which we expect could result in rating changes on up to 25% of our stand-alone hospital credits, mostly by
one notch. We will continue to report rating actions monthly, and indicate during the year whether rating changes are
a result of credit quality, revised criteria, or both.
Table 1
2014 Rating Changes - Upgrades
Ratings
Obligor State To From Outlook
Chattahoochee Valley Hospital Society AL BB+ BB- Stable
Citrus Valley Health Partners CA BBB- BB+ Positive
Sharp Healthcare CA AA- A+ Stable
Woman's Hospital Foundation LA A- BBB+ Stable
Children's Memorial Hospital IL A A- Stable
Norman Regional Health System OK BBB- BB+ Stable
Lewistown Hospital PA AA BBB- Stable
Archbold Medical Center GA A+ A Stable
Northfield Hospital MN BBB BBB- Stable
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Table 1
2014 Rating Changes - Upgrades (cont.)
Rex Healthcare NC AA- A+ Stable
Delnor Community Hospital IL AA- A+ Stable
UC Health OH A- BBB+ Stable
John C. Lincoln Health Network AZ A- BBB+ PositiveStanly Health Services NC A+ BBB+ Stable
St. Peter's Hospital NY A+ A Stable
Scripps Health CA AA AA- Stable
Mercy Regional Health Center Inc. and Affiliates KS A+ A Stable
Deaconess Health System, Inc. IN A+ A Stable
Peterson Regional Medical Center TX BBB BBB- Stable
Vail Valley Medical Center CO A A- Stable
Overlake Hospital Medical Center WA A A- Stable
Texas Health Resources TX AA AA- Stable
St. John Health System OK AA A+ Stable
Willis-Knighton Health System LA A+ A Stable
Valley View Hospital CO A- BBB+ Stable
Winchester Hospital MA A- BBB+ Stable
BRCH Corporate Obligated Group FL BBB BBB- Stable
Nanticoke Memorial Hospital DE BBB- BB+ Stable
Sherman Health IL A BBB Stable
St. John's Medical Center WY BBB+ BBB Stable
Touro Infirmary LA A+ BBB Stable
Howard Young Health Care Inc. WI A BBB+ Stable
Ministry Health Care, Inc. WI AA A+ Stable
St. Barnabas Corporation NJ A- BBB+ Stable
Holy Spirit Hospital PA A BBB+ Stable
Memorial Health System of East Texas TX BBB BBB- Stable
Sky Lakes Medical Center OR A- BBB+ Stable
Hawaii Pacific Health HI A A- Stable
Trinitas Regional Medical Center NJ BBB BBB- Stable
Catholic Medical Center NH A- BBB+ Stable
Community Foundation of Northwest Indiana Obligated Grp IN A A- Stable
Data as of Dec. 31, 2014.
Table 2
2014 Rating Changes - DowngradesRatings
Obligor State To From Outlook
Centegra Health System IL BBB+ A- Negative
St. Josephs Hospital Health Center NY BB BB+ --
North Mississippi Health Services MS AA- AA Stable
Northern Inyo County Local Hosp Dist CA BB+ BBB- Negative
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Table 2
2014 Rating Changes - Downgrades (cont.)
Summit Healthcare Regional Med Ctr AZ BBB BBB+ Negative
PeaceHealth WA A A+ Negative
Halifax Hospital Medical Center Obligatged Group FL BBB+ A- Negative
Hopkins County Hospital District TX BB BB+ NegativeOconee Regional Medical Center GA CCC B Negative
Great Plains Regional Medical Center OK BB BB+ Stable
Roger Williams General Hospital RI B+ BB- Stable
SSM Health Care System MO A+ AA- Negative
Daughters of Charity Health System CA B- BBB- Watch Neg
Heritage Valley Health System PA A+ AA- Negative
Lucile Salter Packard Childrens Hospital CA AA- AA Negative
Tuomey Healthcare System SC CC CCC Negative
Centegra Health System IL BBB BBB+ Stable
Oak Valley Hospital District CA BB BB+ Negative
Lifespan Obligated Group RI BBB+ A- Negative
Newport Hospital RI BBB+ A Stable
Mississippi Baptist Health System MS BBB+ A- Stable
Providence Health and Services WA AA- AA Negative
Lake Region Healthcare Corporation MN BBB- BBB Negative
Oneida Health System NY BB+ BBB- Negative
Crozer Chester Medical Center PA BB BBB- Stable
Lowell General Hospital MA BBB BBB+ Negative
Good Shepherd Medical Center TX BB+ BBB+ Negative
San Antonio Community Hospital CA A- A Negative
King's Daughters Medical Center KY BBB A Negative
Baptist Memorial Healthcare Corporation TN A AA- Stable
Arnot Ogden Medical Center NY BBB+ A- Negative
St. Luke's Health System ID A- A Stable
Reading Health System PA AA- AA Stable
North Oaks Health System LA BBB- BBB Stable
Southwest Mississippi Regional Medical Center MS BB BBB- Negative
National Jewish Health CO BB+ BBB- Stable
Covenant Health System Obligated Group NH A- A Stable
University Medical Center Cor poration AZ BBB BBB+ Negative
Shands Teaching Hospital & Clinics FL A- A Stable
Floyd Memorial Hospital & Health Ser vices IN BBB A- Negative
Tor rance Memorial Hospital Medical Center CA BBB+ A Sta ble
Wake Forest University Baptist Medical Center NC A A+ Sta ble
Good Shepherd Medical Center TX BB- BBB+ Watch Neg
Huntington Memorial Hospital CA A A+ Negative
Catholic Health Initiatives CO A A+ Negative
Daughters of Charity Health System CA CCC B- Negative
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Table 2
2014 Rating Changes - Downgrades (cont.)
Data as of Dec. 31, 2014.
Related Criteria And Research
Related Criteria
U.S. Not-For-Profit Health Care Outlook Remains Negative Despite A Glimmer Of Relief , Dec. 17, 2014
USPF Criteria: U.S. Not-For-Profit Acute-Care Stand-Alone Hospitals, Dec. 15, 2014
General Criteria: Group Rating Methodology, Nov. 19, 2013
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