In the next year, Fitch Ratings expects the nonprofit healthcare systems and hospital sector to receive predominantly affirmative ratings, reflecting the industry’s ability to maintain profit margins and mitigate reimbursement fluctuations, according to its 2012 Outlook Report.
However, rating or rating outlook changes that do occur in 2012 are more likely to be downgrades rather than upgrades for those individual hospitals and healthcare systems whose expense control initiatives don’t keep pace with the economic recession’s negative impact on patient volumes and modest reimbursement rate increases, says the ratings agency.
“Fitch anticipates negative rating actions are more likely to affect borrowers in the low-investment-grade and noninvestment-grade categories,” the report says.
Operating performance is expected to remain stable, and Fitch believes the sector will “maintain profitability metrics consistent with 2011 through continued implementation of shared service consolidation, supply chain improvements, and ongoing operating efficiency initiatives.”
The agency also expects that capital spending will remain muted, with the reduced level of spending seen in 2010 and 2011 to continue into 2012 as providers look to improve throughput and move more clinical services into lower-cost outpatient settings.
With facilities facing more regulatory challenges through the Affordable Care Act as it takes effect in 2012, Fitch expects the credit impact of these changes to be modest, but they will “become increasingly challenging as providers must absorb the revenue cuts before full implementation of the Act in 2013.” This is expected to boost patient volumes and reduce the level of charity care and bad debt exposure.
Fitch expects consolidation in the sector to continue, with the volume of mergers and acquisitions and/or affiliations to increase in 2012. “Fitch believes an increasing number of stand-alone acute care providers will realize that the need for size and scale to drive greater efficiencies is increasingly important in a tighter reimbursement environment,” the report says.
This mostly-stable outlook could change pending significant decline in profitability from reimbursement pressures and/or softening patient volumes, or unexpected regulatory change from the Affordable Care Act and/or significant funding reductions to Medicare and Medicaid without giving providers time to adjust their operations, says Fitch.
“Hospitals and health care providers have focused their efforts on improving operating efficiencies and clinical outcomes and implementing various expense control initiatives to maintain profit margins,” Fitch concluded in the report. “Mergers, acquisitions, and alignment among acute care providers increased during the year and capital spending as a percentage of depreciation expense fell as management focused on improving throughput of existing facilities and delayed spending in response to weaker patient volumes.”
There were 210 affirmations, 23 downgrades, and 16 upgrades in 2011 among Fitch’s hospital and healthcare systems ratings.
Read the 2012 Outlook Report on Nonprofit Hospitals and Healthcare Systems here.
Written by Alyssa Gerace