Fitch Ratings has revised its outlook on the U.S. not-for-profit hospital sector to "negative" from "stable." The revision reflected Fitch's observation of material weakening in several areas affecting hospital creditworthiness.
The New York-based firm also expects that rating downgrades will exceed rating upgrades for the next 18 to 36 months.
Fitch representatives noted that the combined effects of investment portfolio losses, increasing uncompensated care, and higher capital costs are adversely affecting many hospitals' credit profiles.
Fitch also believes that state and federal budgetary pressures stemming from the economic downturn will constrain governmental reimbursement programs, while the business sector will continue to shift healthcare costs to its employees.
These factors, coupled with projections for increasing unemployment over the next several months and declines in acute care utilization, are expected to depress hospitals' operating profitability for the next few years.
According to Fitch, the equity market downturn has eroded the liquidity cushion that many hospitals amassed from 2004 to 2007. While hospitals' unrestricted reserves are still substantial in many cases, Fitch said drops in "days cash on hand" (DCOH) of 20 to 30 percent from 2007 to 2008 were not uncommon.
Fitch analysts note that as the economy slides into a prolonged and severe recession, hospitals have begun to observe two expected results: increasing uncompensated care and declining utilization. Both factors have reduced operating profitability, and the agency expects them to do so over the next several months as well.
Fitch also expects fiscal pressures at state and federal levels to curtail growth in governmental funding levels, further challenging bottom lines.
Because hospitals' access to low cost capital is not expected to substantially improve over the near term, Fitch believes higher capital costs will be unavoidable for many institutions. Hospitals will likely be forced to debt finance committed projects at higher interest rates, and liquidity enhancement for variable rate demand obligations will remain scarce and expensive.
Fitch says that not all hospitals will be affected equally. Higher rated systems, which tend to be those that built up larger reserves of unrestricted cash and investments, those having geographic diversification sufficient to offset sharp losses in certain markets, and those that consistently posted strong operational profitability through effective management practices, are better equipped to withstand the effects of an economic slump and reimbursement pressures.
The agency says such organizations also tend to have better access to capital, more financial flexibility, and ample resources to continue to make capital investments to ensure their competitiveness.
In contrast, the effect is expected to be more severe for lower rated hospitals, which are often smaller and operate in single competitive markets, exhibit profit volatility, or show flat or declining utilization trends. Fitch expects to see rating downgrades moderately weighted toward lower rated hospitals, as well as an increase in merger activity as these more challenged providers seek to best serve their communities through partnerships with stronger entities.
Fitch analysts note that most hospitals have taken steps to address the difficult operating environment's effect on creditworthiness by curtailing or deferring capital spending, reducing staffing to bolster profitability, and, in some cases, adjusting investment allocations to limit further equity losses.
The agency believes these actions, as well as the hospital sector's substantial profitability and balance sheet strength built up over the past several years, should mitigate the damage for many hospitals.