Fitch: Nonprofit children's hospitals poised to ride out COVID-19's financial pressures

Standalone nonprofit children’s hospitals have so far weathered the pandemic better than their adult counterparts. Reduced patient care revenues and profitability at pediatric hospitals were offset by a specialized clinical service mix and overall strong liquidity, according to Fitch Ratings.

In a new report on children’s hospital medians based on 22 providers’ 2020 financials, the ratings agency acknowledged that COVID-19 has had an “undeniable” negative impact on these facilities.

Median total operating revenue for the children’s hospitals reviewed by Fitch was flat year over year at $1.33 billion for 2020. Much of that stability was tied to an estimated $1.1 billion in provider relief funds received by the 22 hospitals, the agency noted.

Profitability, on the other hand, dipped substantially for the children’s hospitals. The median operating margin fell from 7% to 3.8% year over year, the agency wrote, while earnings before interest, taxes, depreciation and amortization (EBITDA) dropped from 12.6% to 9.8% year over year.

“Providers in this sector are well positioned to gradually rebound from recent operating and financial challenges as a result of their essential market roles, and tertiary and quaternary focus," Richard Park, a director at Fitch Ratings, said in the report.

Still, these median operating and EBITDA margins exceeded those observed among adult nonprofit hospitals and health systems (1.5% and 7.3%), according to the report.

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But even as volume reductions took a bite out of their operations, Fitch’s overall strong estimation of the children’s hospital sector was fueled by “all-time high” liquidity.

Days cash on hand increased 13% from 350.4 days to 396.1 days thanks to a blend of taxable debt issuances bolstering unrestricted cash and investments, stimulus funding, expense management efforts and investment market returns, the group wrote.

Meanwhile, children’s hospitals took advantage of low interest rates to refund prior debt issuances and issue new debt, leading median cast-to-adjusted debt to fall year over year from 240.9% to 229.6%. The hospitals still continued capital expenditure but at a reduced rate Fitch said it expects to rebound in 2021.

"Capital spending was lower in the past fiscal year, but this is expected to be a temporary reaction to conserve liquidity given the unknown risks of the pandemic during the March/April 2020 timeframe," Park said.

Looking forward to the rest of 2021, Fitch said a handful of factors including the timing of volume recovery, staffing shortages, pediatric vulnerability to COVID-19, movement toward risk-based contracts and the downstream effects of delayed care may play a significant role in whether children’s hospitals maintain their strong AA- credit profile.

Fitch's report strikes a different tone from a recent letter from the Children's Hospital Association, which pleaded the president for the release of provider relief funding to handle COVID-19 and non-COVID-19 challenges such as workforce shortages and rising pediatric mental health cases.