Health systems are facing uncertainty in their investment portfolios as federal policies shift and investors try to keep up with the changes.
Financial markets including stocks, bonds and other types of investments have been on a rollercoaster ride over the past few months. The volatility is starting to affect health systems' balance sheets and forcing them to reassess funding sources.
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No one knows how long the instability could last. Medicaid cuts are still on the table, and recent tariffs levied by the Trump administration are driving up costs for medical supplies and equipment. At the same time, systems are still feeling the pressure to move ahead with capital projects in response to high patient demand.
Here's what to know as the full impact of market volatility starts to take its toll on health system finances.
What is causing market volatility?
Macroeconomic concerns such as inflation and the fear of a possible recession have played a big role in triggering market volatility. The S&P 500 index, which tracks stock performance for 500 companies across various industries, including healthcare, experienced a sharp decline in early April and is roughly 1% lower from a month ago.
Tariffs enacted by the Trump administration also stoked the fire. In early April, Trump implemented a 10% universal tariff on imported goods, in addition to reciprocal tariffs against dozens of countries before putting them on hold for 90 days.
What aspects of hospital finances are at risk?
Cash flow, reserves and investment income are key parts of the balance sheet affected by market volatility. If a health system’s investments are not performing as well, that means less cash flow. Systems may be forced to rely more heavily on operating income or dip into cash reserves to fund critical projects or infrastructure.
“Overall, financial flexibility has decreased, making it harder for hospitals to respond to unexpected costs or opportunities,” said Nick Donkar, U.S. health services deals leader at professional services firm PwC.
The full impact will likely take months to show up on balance sheets.
How will health systems fare?
S&P and Moody’s analysts say many systems are in a relatively good place to weather the volatility, at least in the short term. Last year was a strong year for investments and cash reserves, which provides some cushion amid financial instability.
Management teams have become more adept at navigating uncertainty and planning for different scenarios following the COVID-19 pandemic and recent labor crisis, said Cassandra Golden, a Moody’s Ratings analyst.
Not everyone has that cushion, though.
PwC’s Donkar, who focuses on nonprofit and for-profit systems, said he is seeing drops in liquidity levels, leading to tighter margins, and reserves being drawn down at a faster rate.
What systems could be hit the hardest?
Donkar said smaller, rural hospitals and independent systems are the most vulnerable, as they often lack robust reserves, diversified revenue streams or economies of scale.
Suzie Desai, sector lead for the nonprofit healthcare group at S&P Global, said investment portfolios with more equity exposure tend to be affected by market volatility. Cash and fixed income investments are typically more stable options.
Systems with capital projects underway could also be vulnerable if they have been relying on investment income to fund them and are forced to look for alternatives, Desai added.
What are systems saying?
Nashville, Tennessee-based HCA Healthcare is planning for adverse effects from health policy shifts and tariff risks contributing to market volatility, though information is limited, CEO Sam Hazen said on the company’s first-quarter earnings call last week.
“We are in a very fluid situation. While we have a general sense for the new administration's stated priorities, we do not have any specifics. It is unclear how these efforts might be carried out and what effects they may have on our business,” Hazen said on the call.
Some systems are starting to see changes in investment income and cash reserves, though some of the changes may not be directly tied to market volatility.
Indianapolis-based Indiana Health University’s investment income dropped to $19.3 million in the first quarter from $327.4 million a year ago. The system’s days cash on hand had dropped to 341 days on March 31, compared with 360 days on Dec. 31. It attributed the drop to increased expenses to fund operations and capital projects.
What about the bond markets?
Reactions to volatility in the bond markets are a mixed bag. Many health systems rely heavily on bond proceeds, especially to cover high-cost inpatient projects. In general, investors purchase bonds issued by a health system or governmental entity, which essentially act as a loan and give the issuer access to capital. The system agrees to repay the principal amount at a set maturity date, in addition to periodic interest payments.
Beth Wexler, vice president and senior credit officer at Moody’s Ratings, said she is seeing more activity than anticipated, including bond deals with tighter turnaround periods. She said there is also an uptick in self-liquidity programs, which are short-term loans that are repaid using money from the asset the funds were used to purchase.
Other systems have decided to back away from bond deals due to the market volatility, choosing to either delay financing plans or look for other funding strategies, Donkar said.
Will the volatility affect credit ratings?
An April report from Fitch Ratings warned that lower liquidity and higher costs could weigh on hospital balance sheets, potentially straining financial stability and creditworthiness.
However, analysts look at a system’s overall performance and try to avoid knee-jerk reactions when market volatility occurs.
“We’re trying very hard to look through the disruption as we do any other market anomaly and rate to the credit’s strengths and challenges at any given point, and what other elements they bring to the table to offset this type of challenge,” Wexler said.
She said analysts will consider systems' management teams and core operating results, in addition to other available funding sources.
“It depends on what is required from that organization from a cash standpoint and then how quickly they need it and what else is going on on the operating side,” S&P’s Desai said.
