Labor, reimbursement rates hit health system credit ratings

Credit ratings downgrades continue to hit some hospitals and health systems despite their efforts to stabilize finances in a challenging economy.

In the first half of 2024, more than 30 hospitals and health systems were downgraded by at least one of the three largest credit rating agencies — Fitch Ratings, Moody's Ratings and S&P Global. The agencies noted challenges such as inflated expenses, including high labor costs, and reimbursement rate negotiations as factors leading to financial stress.

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"There's still plenty of headwinds and credit pressure out there. Not everyone is improving," said Mark Pascaris, senior director at Fitch Ratings.

The year could end with fewer downgrades than 2023. Last year, more than 60 hospitals and health systems were downgraded by Aug. 31.

Credit ratings give investors a quick picture of an organization's financial health and help them determine the likelihood they will be repaid for making investments such as the purchase of corporate bonds and other financial instruments. An organization can be downgraded — or upgraded — by one or more notches. AAA is the highest possible rating. D is the lowest rating at Fitch and S&P, and C is the lowest rating at Moody's.

Lower ratings can lead to higher interest rates for borrowers and more limited access to capital.

Cash flow and operating margins play a role in determining an organization's credit rating. About 15% of the nonprofit hospitals and health systems rated in Moody's portfolio have operating margins at less than 1%, said Eva Bogaty, associate managing director for Moody's Ratings.  After years of COVID-19 pandemic-related stress, systems are more sensitive to disruptions in cash flow, she said.

"As with anything, when you're digging out of a hole, it's very hard to take any further pressure, even if it's momentary. I think that's typically the story that we're seeing in our downgrades," Bogaty said.

Pascaris said health systems in markets with high population growth, more commercially insured patients or both, such as Colorado, Florida and Texas, are in general recovering financially at a faster rate. Some health systems also are benefiting from state-directed Medicaid payments, he added.

Here's a look at credit rating downgrades among hospitals and health systems as of June 30, as reported by the agencies. S&P only reported downgrades through May.