Dive Brief:
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Nonprofit hospitals and health systems need five years to realize expected results for projects, Fitch Ratings said in a new report.
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Capital and strategic projects usually “suppress profitability and key balance sheet metrics before they begin to yield financial returns,” according to the paper.
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Though there are short-term setbacks when capital projects are underway, Fitch Ratings said management can ultimately find success if it has enough cash flow and available capital.
Dive Insight:
Hospitals are struggling with some long-term financial trends, and nonprofits are no exception. Their margins and volumes are threatened by increasing vertical integration and the embrace of value-based reimbursement models. In December, Moody's revised its outlook for the sector from stable to negative, and the services has noted that 2017 saw fewer upgrades and more downgrades among nonprofits than the year before.
That means potentially shaky ground for systems looking to expand services or build new facilities. But Fitch Senior Director Kevin Holloran said hospitals should be able to adhere to Fitch's five-year scenario analysis unless they start a project without enough cash on hand and don't grow revenues.
"Hospitals are showing surprising resiliency thus far in light of recent broader tax reform changes and other secular pressures," he said. "If there is a subset of not-for-profit hospitals that could be affected, however, it would be those organizations that either begin capital projects from a position of financial weakness or are unable to grow top-line revenues."
Fitch said it is often asked how long investors should wait before seeing rating results when a company is undertaking a capital project. Five years is a good gauge to figure out whether a hospital can maintain its ratings through a cycle, the ratings agency said.
A hospital's balance sheet can't avoid taking a hit during a capital project, but enough cash on hand will soften the impact, Holloran said in a statement accompanying the report. "Whether the hospital can generate enough cash flow until the capital project is completed will go a long way in dictating whether the rating is affirmed, upgraded or downgraded," he said.
When figuring out how projects will affect a company’s short-term finances, Fitch said agencies usually assign ratings on a case-by-case basis. This means investors don’t have a “clear timeline about how long a rating can be sustained without proven success.”
With that in mind, Fitch Ratings launched the five-year Fitch Analytical Stress Test (FAST) scenario analysis. FAST sets the ratings organization’s expectations for performance “in a normal business environment” and considers capital investments and operations. “Fitch believes ratings should not change due to normal business cycles, including periods of increased capital or strategic investment, and that long-term ratings should account for this and remain stable ‘through the cycle,’” the agency said.