A new report from Fitch Ratings raises a question that's likely been on the minds of many who follow the not-for-profit hospitals and health systems: Has acute-care profitability begun a permanent decline?
Yet, even as those providers' margins have slid steadily downward in the past three years, their balance sheets are at an "all-time high," said Kevin Holloran, a senior director with Fitch Ratings.
"So it's like, 'Are we coming or are we going?' We're actually doing a little bit of both right now," Holloran said. "It's a little bit of a mixed-up, muddled world."
Health systems have benefited from stock market windfalls, especially in 2015 and 2016, and healthy cash flows. But despite those trends in their favor, they've still kept capital spending relatively modest, Holloran said.
One-quarter of the more than 200 hospitals and health systems included in Fitch's August median calculations had AA- ratings, up from 17% at the same time in 2017, according to the report. That's mostly because hospitals moved up to AA-, partly a product of Fitch's new ratings criteria. During the same period, Fitch rated fewer hospitals and health systems BBB+ or below.
Fitch's revamped criteria introduced two new metrics into the mix: cash to adjusted debt and net adjusted debt to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). Adjusted debt refers to long-term debt, including pension and lease obligations. Cash to adjusted debt is more comprehensive than merely cash to debt, because it captures issuers' "promise to pay," according to Fitch's report.
Fitch in turn focuses less on classic measures like maximum annual debt service coverage and days' cash on hand.
On a broader level, Fitch is de-emphasizing size and scale in its credit rating analyses, Holloran said.
"Just because you're big doesn't mean you get a high rating," he said. "Just because you're on the smaller side doesn't mean you get a low rating."
Even as consolidation in the sector is expected to continue, the jury is out on whether bigger is indeed better for hospital and health system's ratings. While smaller systems are often at competitive disadvantages compared with their larger peers because they're unable to negotiate higher rates from commercial insurers in their markets, health systems can see dips in profitability when they initially come together, according to Fitch's report. Holloran said he's working on a forthcoming report examining consolidation's impact on hospitals' ratings.
One thing is certain, according to the report: The country's roughly 1,300 critical-access hospitals will continue to struggle, and many will close or become free-standing emergency rooms or urgent-care clinics in the coming years. The higher federal cost-based reimbursement that used to sustain them may not be enough long-term, as admissions fall and what were traditionally inpatient services are now performed outside of hospitals.
The landscape is further complicated by new entrants into healthcare such as Amazon, Aetna and CVS Health, which appear to have no interest in inpatient care, and instead want to capture things like office visits, pharmaceuticals, imaging and physical therapy, Holloran said.
"If these really smart, well-capitalized players are saying, 'We want nothing to do with inpatient stuff,' it kind of makes you scratch your head, 'Why is that better to go gobble up more of that? Aren't you just buying low-performing assets?' " he said.
It's a question everyone has a different answer to. While some healthcare industry thought leaders say scale is better and health systems should buy more hospitals, still others warn it would drive them out of business.
"Fitch's perspective is: If you've got size and scale and you can use it to improve your bottom line and balance sheet, then great," Holloran said. "But if it's not really helping you, why would you get a higher rating just for being big?"
