The credit quality of California’s non-profit hospitals remains strong despite the local severity of the economic downturn and the state's unique operating mandates, according to a new report by Fitch Ratings.
Fitch, one of the “big three” ratings agencies, says the state's large integrated providers have demonstrated credit stability or improvement by leveraging their market presence to garner favorable contracting rates, meticulously managing their expenses and restructuring their assets and liabilities.
With a high concentration of large regional systems, Fitch-rated California hospitals are skewed to the higher end of the rating scale, compared with national medians.
As of this month, Fitch rated 24 California-based hospitals and health systems, with the rating distribution heavily weighted on the higher end of the scale compared with Fitch's overall hospital portfolio. Of the 24 ratings, 16 are rated in the 'A' category or higher, seven in the 'BBB' category, and one 'D'.
The report reveals that, as a class, Fitch-rated California hospitals have operating cash flow margins that outperform Fitch-rated hospitals nationwide. The financial performance of Fitch-rated California hospitals is relatively strong given the disproportionate concentration of large regional health systems within the Fitch-rated portfolio.
The median total operating revenue of the California acute care hospitals is $1.35 billion, compared with the nationwide median of $506 million.
In addition to facing operational pressure as a result of healthcare reform, California hospitals face unique challenges that can strain ratings, the report says. The state's mandate to seismically retrofit or replace hospital facilities, exposure to the state's chronic late budgets, having one of the lowest Medicaid reimbursement rates and difficult staffing requirements are all continuous credit challenges for California hospitals.
The outlook for Fitch-rated California credits doesn't differ from the outlook for its overall rated entities, the report says, and Fitch generally expects top tier credits to continue to produce strong results and says weaker credits may deteriorate or merge into larger providers as the credit gap continues to widen.
Fitch believes that large integrated healthcare delivery systems are better positioned to capitalize on the post-reform environment given their level of information technology investments, physician alignment strategies and focus on care coordination.