S&P credit outlook weak for nonprofit healthcare providers in 2015

S&P said about 15 percent of its outlooks in the sector were negative compared to 14 percent in the prior year.

You can expect more credit downgrades than upgrades in 2015 among the country’s nonprofit hospitals, Standard & Poor's announced this week, as expensive upgrades and pressures to convert to value-based payment systems continue to gnaw away at bottom lines.

The rating agency outlined its soft view for the sector in a year-end analysis of nonprofit healthcare released on Thursday. In it, S&P said there were 46 downgrades in 2014, compared to 41. And upgrades often were not solely due to strong hospital cash flow. Only 60 percent of the upgrades were attributed to creditworthiness while the rest were due to mergers and acquisitions that shored up businesses.

“Operating margins were pressured by top-line revenue constraints, soft demand, a movement toward value- and risk-based payment structures, the impact of reform readiness activities, and the high cost of electronic medical record implementation and maintenance,” S&P said in its report. “While we have seen some relief stemming from the expansion of health insurance coverage under the Affordable Care Act which improved revenue streams at many hospitals, merger-and-acquisition activity, and strong investment markets in 2014, these forces have not been sufficient to reverse the generally negative trends driven by revenue and cost pressures.”

While about 75 percent of the nonprofit health systems watched by S&P had credit ratings between ‘A’ and ‘BBB,’ positive credit outlooks were unchanged in the year. However, S&P said about 15 percent of its outlooks in the sector were negative compared to 14 percent in the prior year.

One problem are the government incentives nonprofits receive in the form of meaningful use funds. S&P said meaningful use cash, in addition to provider tax programs, has helped pad reserves but it thinks most providers have already seen their biggest meaningful use payments. The agency is also cautious about tax programs.

“In our view, the long-term survival of provider tax programs is not assured and will thus need to be monitored as a credit factor,” the report said.

While the financial uncertainty in the nonprofit health sector has credit agencies wary about the future, the same can’t be said for larger, for-profit systems. Helped by their size and their Wall Street backing, for-profit systems are performing well as patient volumes are climbing and bad debt is dropping. Just last week, another ratings service, Fitch, raised its outlook on for-profit healthcare.

[Also: Fitch bullish on for-profit]

As for nonprofits, S&P said most downgrades were due to declines in patient volumes and the string of quarterly losses posted by these providers.

S&P also said the Medicaid expansion has not yet affected its ratings system. Providers in states that have expanded the federal program made up half of both downgrades and upgrades.

“Although some hospitals posted improved margins that management attributed to increased Medicaid enrollment, we believe that Medicaid expansion isn't by itself sufficient to fully counter the negative pressures facing many providers,” S&P said.

But the agency noted that conditions could change. “We believe 2015 will be a more telling year as a larger number of providers will have had a full year of Medicaid expansion experience.”

Twitter: @HenryPowderly

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