Credit downgrades for nonprofit hospitals again outpaced upgrades across 2024, though the difference between the two narrowed compared to the year before, according to a review of three credit agencies' rating actions published Wednesday.
Moody’s, S&P and Fitch collectively issued 95 downgrades and 37 upgrades in 2024, as opposed to 116 and 33 in 2023, wrote Kaufman Hall Managing Director Lisa Goldstein.
She and her firm expect the trend to continue into 2025 “given a growing reliance on government payers, labor challenges and a competitive environment."
"Policy and funding changes will also cast uncertainty into the mix in 2025 and may cause credit deterioration in future years,” she wrote on Kaufman Hall’s website.
The past year’s downgrades reflect continued expense pressures being felt across the nonprofit subsector, though these were somewhat mitigated by recovering volumes and reduced use of contract labor, she wrote. Other downgrades came from hospitals taking out new debt on the bond market to fund their growth strategies.
The downgrades hit numerous types of hospitals, whether they be smaller independent providers, larger regional systems, academic medical centers or children’s hospitals, Goldstein continued. The downgrades commonly cited these hospitals’ weaker financials, shifts toward a governmental payer mix and dwindling reserves, she wrote, and many downgrades occurred among low or below investment grade categories.
The upgrades, meanwhile, most often came after a low-rated hospital merged with a higher-rated system, though some were the result of improved performance and strengthened liquidity. Some hospitals with upgraded rates had begun receiving Direct Payment Program supplemental funds, which Goldstein noted have “uncertain” long-term reliability compared to other types of supplemental funds.
The upgrades were spread among several types of providers spanning the country, and most of those whose upgrades did not come from a merger were already in investment grade categories.
Despite hospitals’ shifting fortunes, ratings affirmations still made up the “overwhelming majority” of rating actions out of the three credit agencies and will likely do so in 2025, Goldstein said. Providers turning to the bond market should also benefit from investors’ bolstered view of the industry following S&P and Fitch adjusting their industry outlooks from “negative” and “deteriorating,” respectively, to “neutral.”
“However, even with the stability viewed by the agencies, we expect downgrades to outpace upgrades given a growing reliance on government payers, labor challenges and a competitive environment,” Goldstein wrote.
The prediction falls in line with outlooks on the broader hospital sector provided by Kaufman Hall and the Healthcare Financial Management Association going into the new year. Leaders with both groups told Fierce Healthcare that stabilizing margins, volumes, length of stay and other metrics are on a rebound trajectory, while supply pressures and reimbursement trends present clear headwinds—particularly for hospitals that are already struggling.