- Despite healthier balance sheets, nonprofit hospitals continue to see shrunken operating margins, a new Fitch Ratings report finds.
- Fitch's 2018 medians paint a picture of declining operating margins across the hospitals rating spectrum, suggesting ongoing stress in the sector. The median operating margin in 2017 was 1.9%, down from 2.8% in 2016.
- Despite declining operating margins, the median rating for Fitch's rated credits remains an A, with hospitals showing improvements in all key balance sheet metrics.
Fitch updated its rating criteria in January, emphasizing balance sheet strength over operating profitability, and playing down size and scale. That change, and the improvement in balance sheets, resulted in not only an overall A median rating but AA- being the most common rating in the Fitch portfolio — at 25%, up from 17% the previous year.
The share of AA rated hospitals rose 9.6 percentage points to 34.1%. Meanwhile, the percentage of hospitals rated BBB+ or below dropped to 24.1%. The ratings are based on audited 2017 data.
Overall, balance sheets are at an all time high, Fitch said. Median days cash on hand rose to 213.9 in 2017, from 195.5 a year earlier, while cash to debt increased to 159% from 142.8%.
Fitch tempered the good news with a warning: Continued decline in operating margins will threaten even strong balance sheets.
"Operating margins remain under pressure for the second straight year, which means stress is not letting up for not-for-profit hospitals," Kevin Hollaran, senior director of Fitch Ratings, said in a statement. He pointed to labor and wage pressures for experienced staff, as well as the shift to population health and value-based contracting.
The credit rating agency said it is maintaining its negative sector outlook due to those operational pressures and the shakiness of operating margins.
The analysis of nonprofits includes two new ratios: cash to adjusted debt and net adjusted debt to adjusted EBITDA.
For the second straight year, median profitability levels declined, with median operating and operating EBITDA margins of 1.9% and 8.5%, respectively, versus 2.8% and 9.5% a year earlier. This suggests hospitals are constantly focused on operational and clinical improvement efforts to counter the effect of smaller commercial rate increases and lower Medicare and Medicaid reimbursements, according to the report.