Fitch brightens its view on nonprofit hospitals
Fitch Ratings said its "Rating Watch" for U.S. nonprofit hospitals and health systems is over after the organizations showed improved or stable results this year.
During a six-month review of 125 existing issuers, Fitch affirmed 52% of the graded facilities and upgraded 28%.
More than 93% of rating changes moved only one to two notches. There were two extreme outliers. Fitch downgraded Lexington Medical Center six notches due to pension liability. Presence Health Network, meanwhile, shot up seven notches.
Fitch's move is a sign of optimism for nonprofits reeling from years of wobbly financial times. The report comes months after Moody's revised its outlook for the sector from stable to negative. That move followed nonprofit hospitals seeing more credit downgrades in 2017.
Nevertheless, Fitch's announcement this week shows that hospitals are finding ways to combat tough finances, including lower reimbursements and inpatient admissions. One way acute care hospitals confront those issues is by investing in outpatient services. The strategy helps health systems defend market share.
At the end of 2017, Fitch said investing in outpatient assets is usually favorable for credit profiles, but also leads to "more economic cyclicality and seasonality in patient volumes for hospital companies."
In its report this week, Fitch said a hospital's cash and investment portfolio and asset allocation policy play significant roles in its creditworthiness. Balance sheet strength is also an essential piece of ratings — more than operational success or size and scale.
Fitch said size and scale are no longer direct rating factors. However, Fitch may consider if the size and scale enhance or weaken its ability to provide rating stability.
“As borne out by Fitch's rating actions, it is apparent that providers with strong net leverage are able to withstand potential financial pressures and return to existing rating levels more quickly than credits without strong balance sheet metrics," the ratings agency said.
Fitch's review of 125 existing issuers was just under half of its total acute portfolio. Fitch Ratings Senior Director Kevin Holloran said it's somewhat surprising there were more upgrades than downgrades.
About half of the upgrades were connected to criteria revision, 14% based on credit reasons and 34% because of a combination of credit and criteria reasons. On the other end, about half of downgrades were based on criteria review, 24% on credit reasons and 24% on a combination of credit and criteria factors.
Holloran said upgrades were mostly from "long-time consistent performers that benefited from a 'new look' through the lens of our upgraded criteria." Downgrades were more varied, but balance sheet strength played a pivotal role in predictable credit stability.
Fitch said the future rating trajectory for nonprofit hospitals is "normalcy." That said, Holloran noted that the sector is dealing with multiple operational challenges this year. Those issues, including external factors, such as regulations and legislation, could drag into 2019.