Analysts see positives in healthcare as planned issuance rises

Not-for-profit healthcare finances should improve this year, rating agencies said, and many healthcare issuers plan to test the bond market.

The sector reached a “turning point” in calendar year 2023, Fitch Ratings said in a report released Wednesday.

The latest perspective offers a shift from challenges and expectations analysts predicted as recently as January.

Analysts believe not-for-profit healthcare median operating margins should improve in the next six to 18 months.


More organizations are making plans to issue debt, Moody’s Investors Service Assistant Vice President Matthew Cahill said.

“Elevated [healthcare] issuance early in 2024 signals a return for many systems to a climate of capital investment and borrowing activity, but market technical factors related to the fall election cycle may accelerate borrowing activity into the early part of the year,” Kaufman Hall Managing Director Robert Turner and Senior Vice President Erik Swanson said.

S&P Global Ratings Senior Director Suzie Desai said there may still be more downgrades than upgrades this year.

“Though many hospitals are still struggling to grow revenues due to lack of adequate staffing and skilled nursing bed unavailability, personnel costs are easing,” said Fitch Senior Director Kevin Holloran.

Facilities with later reporting dates will show “comparatively more profitable months in the latter half of fiscal 2023, which will pull up Fitch’s full year medians,” Holloran said.

Fitch said it believes median operating margins improved to 0.5% to 0.7% in calendar year 2023, compared to the negative 0.5% for providers whose fiscal years ended June 30, 2023. The median should increase to 1.6% in 2024.

“While this is still below pre-pandemic levels, margin improvements fueled by positive labor indicators, volume diversification and efficiency initiatives lead us to believe that margins could return to near historical tends around 2025-2026,” Holloran and Fitch Senior Director Mark Pascaris said in a written statement.

Moody’s also sees the sector’s finances becoming stronger. “We expect 2024’s performance to continue its trajectory of gradual improvement, with median operating cash flow margins expected in the 6-7% range, following a trough in 2022 [of] 4.9%,” said Cahill.

Desai expects “some improvements” in the sector, varying by entity “We still see headwinds in the sector related to labor and other expenses, a challenging payor environment including increases in denials, and the steady migration of the aging population … to Medicare.”

While hospital margins have improved, they remain “well below historical levels, and high-performing hospitals have seen most of the margin growth,” Turner and Swanson said in an email. “Middle and bottom performers have stagnated, and likely need to invest in their systems and expand their service offerings to remain competitive.”

Financial performance remained stable in the past few quarters and the sector “has not experienced disruption due to a winter ‘tripledemic’ as seen in prior years,” Cahill said.

While revenues are improving, “the sector is coming off a bumpy period and continues to face challenges as institutions work to optimize operations within a still challenging and evolving post-pandemic environment,” said Peter Scherer, a director at Kroll Bond Rating Agency. “Labor costs, notably related to nurses, remain a key concern, with smaller hospitals in more rural markets disproportionately exposed. Higher prices for supplies and drug procurement remain additional concerns.”

Holloran said, “Absolute levels of liquidity are holding steady, but more importantly key ratios like days’ cash on hand, and cash to debt, are stable to improving slightly compared to historical norms.”

Cahill cautioned, “about 20% to 25% of healthcare entities we rate are struggling to achieve sustainable levels of operating cash flow, and for them the road to improvement will be longer.”

Desai agreed, “it is a mixed bag for those that have been struggling over the past few years.”

Health systems will remain focused on steps to reduce labor costs and to increase revenues through improved insurance reimbursements, Cahill said.

Many organizations serving low-income and rural areas will receive “substantial financial benefits” from one-time U.S. Health and Human Services payments, Cahill said. The Center for Medicare and Medicaid Services estimates $10.6 billion will be paid to 1,686 hospitals to make up for underpayments between 2018 and 2022. New state Medicaid rules will also help the hospitals.

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