Moody's, Fitch shift financial outlook to negative for nonprofit hospitals

Moody's Investor's Services and Fitch Ratings are shifting the outlook to negative for nonprofit hospitals as they scramble to respond to COVID-19. (Getty/Ca-ssis)

In the wake of the global pandemic, hospital system finances are taking a beating. 

Publicly-traded health system shares have plummeted in recent weeks as worried investors have shifted their focus to technology-powered businesses such as telehealth.

Now, Moody's Investor's Services is shifting the outlook for nonprofit hospitals downward from stable to negative as they scramble to respond to COVID-19.

Overall, earnings are expected to decline over the next 12 to 18 months as caring for patients infected with the coronavirus increases costs and reduces profitability, officials said. Previously the rating's agency projected EBITDA growth of 3% to 4% this year. 

RELATED: Hospital stocks are getting hammered by COVID-19

"Hospitals are deferring elective procedures to focus on treating patients infected with the virus, which will hurt their profitability," wrote Jonathan Kanarek, a VP senior credit officer and Jessica Gladstone, an associate managing director at Moody's in their latest report. "Cost management will become more difficult as hospitals pay overtime, hire contract workers or seek supplies from alternative vendors."

Meanwhile, hospitals' payer mix will also suffer as many coronavirus patients who require treatment are older and insured by Medicare, which pays lower reimbursement rates than commercial insurance.

An economic downturn as a result of jobs' lost during the pandemic could further exacerbate a poor payer mix if it causes patients to lose commercial insurance. 

Fitch Ratings also reported a negative outlook for nonprofit hospitals and health systems.

For the majority of rated credits, Fitch expects that the coronavirus will cause delayed earnings as elective procedures are temporarily suspended, but these will resume after the crisis abates.

Hospitals that have lower liquidity, particularly those with a high concentration of senior patients, are more vulnerable as they are unable to easily absorb declining reimbursement as more lucrative elective surgical cases are replaced by medical volumes, Fitch officials said. 

RELATED: Why Fitch outlook on nonprofit hospitals says there are 'ample reasons for optimism'

"Severe disruptions to operations and longer-term economic pressures could affect provider and consumer decisions for years to come," Fitch officials said. "With this outbreak, hospitals will very likely end up at peak capacity levels or beyond for an undetermined amount of time, with high demands for specific services such as intensive care unit beds and ventilators."

However, Fitch analysts said, those that are higher rated should have "sufficient financial cushion to absorb an increase in operating costs and the effects of a shift in volumes associated with the spread of the coronavirus without meaningfully affecting credit profiles". 

"While we do not initially expect sector-wide rating changes, smaller single-site facilities with lower liquidity levels are at heightened credit risk," Fitch analysts said. "Beyond the near term, risks associated with the economic disruption caused by the outbreak are expected to increase pressures on operating margins for all providers."

In the medium term, hospitals may face sustained increases in supply costs, ongoing spending for future preventative measures, and delays in expansion projects, which would lead to deterioration in operating margins and pressure ratings, Fitch said.

Longer-term rating concerns relate to the virus’ negative economic effects on local economies, which in turn could lead to reduced volumes and a weakened payor mix well after the initial effects of the coronavirus are managed. 

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