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Not-For-Profit Healthcare:
Market Trends & Outlook
Rating Upgrades and Downgrades – Methodology and Lessons Learned
AzHFMA 2019 Fall Conference
Mark Pascaris, Director
September 12, 2019
• Introduction
• Market Trends and Outlook
• Credit Rating Upgrades and Downgrades: Methodology and Lessons Learned
• Longer Term Perspective – There is Reason to be Optimistic
Agenda and Introductions
2
Fitch Maintains Two Outlooks for the Not-For-Profit
Healthcare Industry
2019 Stable Rating Outlook
2019 Negative Sector Outlook
Market Trends and Outlook
3
Fitch’s Stable Rating Outlook is based on expectation that management can still extract operating
efficiencies and from the added protection from increased liquidity
Sector’s strong liquidity position provides a good financial cushion to adapt to challenging operating
environment and is expected to keep ratings generally stable for 2019
Continued pressure on reimbursement is expected, via as commercial volumes shift to Medicare as the
population ages, potential weakening of Medicaid reimbursement, commercial payor consolidation, etc.
We expect that rating Upgrades and Downgrades will be approximately equal
Providers still possess the ability to extract further clinical efficiencies, as management teams continue to push
supply chain savings, revenue cycle management, judicious capex, and ultimately clinical care redesign
We believe the sector can absorb some compression/volatility in profitability due to strong balance sheet
positions of many rated providers
Market Trends and Outlook: 2019 Stable Rating Outlook
4
Fitch maintained its Negative Sector Outlook, as expectations for a more challenging operating
environment have been mostly deferred, not diminished
External headwinds old and new
Continued tightening of Medicare and Medicaid reimbursement reflecting increased penalties under value-
based reimbursement and expansion of bundled payments
Managed care contract negotiations are likely to be increasingly antagonistic
Providers demand higher rate increases to offset higher Medicare and Medicaid volumes
Cost shift from employers to employees
Continued consolidation among commercial payors
Expense pressures from tight labor markets, increased pharmaceutical and implant cost
Global economic uncertainty
Consumerism, payor mix erosion, low commercial rate increases and exposure to risk-based contracting
‘Non-traditional’ competitors
Piecemeal dismantling of ACA (e.g. repeal of individual mandate, work requirements)
Market Trends and Outlook: 2019 Stable Rating Outlook
5
Credit Rating Upgrades and Downgrades: Methodology and Lessons Learned
Not-for-Profit Hospitals and Health Systems Ratings Criteria in January 2018 (updated Criteria in May
2019)
Three broad areas of Criteria analysis:
Revenue defensibility: market share and market quality
Operating risk profile: expectations of ability to generate cash flow (operating EBITDA %) and Capex needs
Financial profile: forward-looking expectations of cash-to-adjusted debt and net adjusted debt-to-adjusted
EBITDA in a stress case
~Half of hospital system ratings were affirmed after Criteria rollout, and majority (~80%) remained
within a notch
6
Keys to success in operating in a dynamic reimbursement environment
Demonstrated ability to improve and sustain high level of quality results
Understanding the dynamics of a local patient and payor population and their respective healthcare needs
Aligning physician productivity models with successful outcomes of the hospital system
Successful continuous improvement process to increase efficiency and reduce total cost of care
Understanding that consumers will be increasingly savvy about healthcare choices and realization that this
will lead to a new competitive dynamic in the industry (i.e., the “uberization” of healthcare)
Ability to operate in multiple reimbursement worlds simultaneously is critical to financial health
Understanding capital investments needs will evolve over time
Having a strong balance sheet always helps
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Credit Rating Upgrades and Downgrades: Methodology and Lessons Learned
Fitch’s Longer Term Perspective: There is good news
Stein’s Law: “Trends that cannot continue, don’t”
Recent losses are potentially one-time in nature• Forays into health exchanges or provider sponsored health plans (fixed)• Less urgent need for inpatient beds (capital savings)• Significant capital and operational spend on EMR over
Aging population – for organizations that are able to managed to break-even or better, they will
have a growing, heavy utilization population that will absorb significant levels of fixed costs
Better prepared management teams• Seen this before with Prospective Payment System, BBA, and Sequestration• Lean processes and improvement initiatives now part of annual efforts• Fitch sees pockets of success
• Children’s hospitals• Large stand-alone facilities• Super-regional systems with significant market concentration
2018 median data support a “leveling” of performance beginning in fiscal 2018!3/26/2019: “Beyond the One Year Outlook: Ample Reason to be Optimistic”
8
Acute Care Rating Distribution
~220 Hospital and Hospital Systems
Median Rating: ‘A’
US Nonprofit Healthcare Portfolio
10
Hospital & Hospital System Financial Performance
11
Hospital & Hospital System Financial Medians
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fitchratings.com
@fitchratings
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New York, NY 10019
London30 North Colonnade
Canary Wharf
London, E14 5GN
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