Fitch: Finances of non-profit hospitals continue to improve

Cash flows and other financial indicators are making gains for some non-profit hospitals, but only those in a strong financial position to begin with, according to a Fitch Ratings report. 

The agency attributed its bullish outlook primarily to the increased number of insured patients that hospitals now see as a result of the Affordable Care Act (ACA). "Growing clarity on the fate of the ACA has since provided more stable expectations as hospital issuers execute strategic plans, it observed in a recent report. "While continued challenges to the ACA are likely, many of the key provisions that have been the impetus of hospitals' financial improvements are increasingly likely to stay."

The fairly positive outlook for not-for-profits joins Fitch's rosy assessment of for-profit hospitals released earlier this year. 

As a result, operating margins, cash flows and days of cash on hand improved for many non-profit hospitals. But Fitch observed that "they were concentrated in the 'A' and 'AA' rating categories, highlighting the widening credit gap between higher- and lower-rated borrowers." By contrast, the report observed that "the median operating profitability metrics for 'BBB' rated issuers declined year over year, continuing its negative trend since 2011 and illustrating the particular challenges faced by mostly smaller healthcare providers."

Although the percentage of lower-rated hospitals Fitch follows has decreased in recent years (BBB ratings dropped to 30.6 percent this year, compared to 34.6 percent last year), it attributes that primarily to mergers by lower-rated hospitals with higher-rated partners.

As for the implementation of ICD-10, Fitch said that "while further revenue cycle challenges are ahead with the transition...most investment-grade issuers have planned adequately and have sufficient financial cushion to endure potential revenue cycle disruptions." Fitch has expressed concern in the past that ICD-10 implementation would cause financial disruptions to the hospital sector and could damage credit ratings.

Fitch also said the momentum non-profit hospitals currently have is expected to continue through 2015 then "taper in the following 12 months-24 months as reimbursement pressures and supplemental funding cuts begin to accelerate."

To learn more:
- read the Fitch announcement