u.s. not-for-profit health care sector's year-end review indicates pressures from 2014 keep the...

8/10/2019 U.S. Not-For-Profit Health Care Sector's Year-End Review Indicates Pressures From 2014 Keep The Outlook Negative

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U.S. Not-For-Profit Health Care Sector's Year-EndReview Indicates Pressures From 2014 Keep TheOutlook Negative

Downgrades slightly exceeded upgrades in 2014 for the second consecutive year in the U.S. not-for-profit health care

sector in a trend that is likely to continue in 2015 (see charts 1 and 2). The negative trend is even more pronounced

when excluding ratings that were raised due solely to the benefits of mergers and acquisitions or the impact of our

group rating methodology.

Operating margins were pressured by top-line revenue constraints, soft demand, a movement toward value- and

risk-based payment structures, the impact of reform readiness activities, and the high cost of electronic medical record

implementation and maintenance. While we have seen some relief stemming from the expansion of health insurance

coverage under the Affordable Care Act which improved revenue streams at many hospitals, merger-and-acquisition

(M&A) activity, and strong investment markets in 2014, these forces have not been sufficient to reverse the generally

negative trends driven by revenue and cost pressures.

Overview

Our 2015 outlook for the sector is negative.

There were 46 downgrades compared to 41 upgrades in 2014.

Approximately 60% of the upgrades were due solely to improvement in credit quality, while the remaining

upgrades were related to M&A activity and our group rating methodology.

The percentage of negative outlooks rose from 2013.

Most of our ratings were affirmed with a stable outlook.

Although downgrades outpaced upgrades, most of our ratings were affirmed, which is consistent with historic trends.

In addition, there were several positive rating actions in 2014, many of which were due to mergers and acquisitions.

However, Standard & Poor's Ratings Services believes the operating and financial pressures on not-for-profit hospitals

and health systems will persist in 2015, leading to more downgrades than upgrades for the third year in a row.

Accordingly, our 2015 outlook for the sector remains negative.

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JANUARY 15, 2015 2

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Chart 1


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U.S. Not-For-Profit Health Care Sector's Year-End Review Indicates Pressures From 2014 Keep The OutlookNegative


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Chart 2

An Increase In Negative Outlooks

At the end of 2014, 75% of all not-for-profit acute care ratings were in the 'A' and 'BBB' categories (see chart 3), which

is about the same as in 2013, although the number of speculative-grade credits rose one percentage point. Rating

stability in many cases was driven by continued balance-sheet improvement, with strong investment markets, receipt

of meaningful use funds, and provider tax programs all contributing to higher unrestricted reserves. We believe many

hospitals have already received the largest portion of meaningful use proceeds and that these funds will phase out in

the next few years. In our view, the long-term survival of provider tax programs is not assured and will thus need to be

monitored as a credit factor.

About one-third of all credits rated and reviewed in 2014 had either rating or outlook changes. In a reversal of the

trend from 2011 through 2013, positive outlook changes slightly exceeded negative outlook changes on credits with

affirmed ratings (see charts 4 and 5). However, most negative outlook revisions (which included outlooks changing to

stable from positive and to negative from stable) were to negative from stable, indicating a strong likelihood of future

downgrades. Of the positive outlook revisions (which included outlooks changing to stable from negative and to

positive from stable), about one-third were revisions to stable from negative; these changes are not indicative of future


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upgrades. Negative outlooks now total 15% of all outlooks compared with 14% a year earlier. Positive outlooks are

unchanged from 2013 at 8% of all outlooks. Compared with 2013, a slightly lower 77% of ratings carry stable outlooks.

During 2014, we upgraded 41 providers and downgraded 46 for a ratio of 0.9:1 (see tables 1 and 2). This represents a

slight improvement from 0.8:1 in 2013 but is still well below the 1.2:1 ratio in 2012. Approximately one-third of

downgraded credits are now speculative grade. In addition, one-third of downgraded credits continue to carry negativeoutlooks, indicating the likelihood of further rating deterioration. There were no downgrades attributable to M&A or

related activity. With few exceptions, most upgrades occurred within the investment-grade categories.

The primary reason for last year's downgrades, apart from a few exceptions, was weak operating trends as large

volume declines led to operating losses. Other factors included costly technology installations and maintenance and

health reform readiness. Many upgrades were due in part to stronger balance sheets brought on by robust investment

markets, although 16 were due solely to M&A activity and the application of our group methodology rating. These 16

upgrades included nine multinotch rating changes.

Chart 3


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Chart 4


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Chart 5

Higher Ratings Will Be A Challenge For Many Systems

Slightly over half of the upgrades were to or within the 'A' category, which continues to be the highest percentage

rating category for both stand-alone and system providers. About one-quarter of the upgrades occurred within the

'BBB' and speculative-grade categories, including three credits moving to investment grade from speculative grade.

Most of the upgrades affected stand-alone hospitals and were attributable to both improved credit quality as well as

rating uplift resulting from integration into higher-rated systems. While there were upgrades of eight systems, we

believe that systems in general will find it increasingly difficult to achieve a higher rating in the current operating

environment because their ratings are already skewed to the upper portion of the rating scale (see chart 6).


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Chart 6

M&A Activity Masks Drop In Credit Quality

Substantial M&A activity as well as the application of our group rating methodology increased the number of upgrades

but did not contribute toward any downgrades, masking the deterioration of credit quality in the sector. Of the

upgrades, 39% were due to M&A activity. All the downgrades were due to weakening credit quality. In comparing

rating activity due to credit quality alone, there were almost twice as many downgrades as upgrades.

In 2014, stand-alone hospitals accounted for 80% of upgrades and 74% of downgrades. Of the raised stand-alone

ratings, almost half of the changes were due to mergers and acquisitions and group rating methodology. We expect

some of these stand-alone credits would have experienced rating deterioration without rating support derived frombeing part of a larger system, especially as over half of these credits were in the 'BBB' rating category. In addition,

many organizations joined larger organizations last year and subsequently had ratings withdrawn as their debt was

repaid or refinanced. We believe this has also masked what would have been a further decline in credit quality.

Although mergers and acquisitions can offer immediate credit improvement, we believe the trend itself isn't strong

enough to offset the negative impact of the sector's many pressures. In the longer term, we still expect a softer

operating performance.


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Negative Actions Were Skewed Toward Lower-Rated Credits

The downgrades were skewed toward lower-rated credits, with 67% to or within the 'BBB' and speculative-grade

categories, and 33% to or within the 'AA' and 'A' categories. Historically, many of the upgrades and downgrades

occurred in the top and bottom of the rating spectrum, respectively. However, the rating changes are increasinglyoccurring across a broader spectrum, including the 'AA' rating category where 15 credits were downgraded within the

category or to the 'A' category. The downgrades continue to disproportionately affect stand-alone providers although

health systems are not immune, accounting for 26% of 2014's negative rating actions. The downgrades also

disproportionately affected the speculative-grade categories, with one-third of all 2014 downgrades into or within

speculative grade.

Medicaid Expansion Hasn't Yet Affected Ratings

So far, we do not see a correlation between rating changes and individual state participation in the expansion of

Medicaid under the Affordable Care Act. In 2014, providers in expansion states represented slightly over 50% of both

upgrades and downgrades. Although some hospitals posted improved margins that management attributed to

increased Medicaid enrollment, we believe that Medicaid expansion isn't by itself sufficient to fully counter the

negative pressures facing many providers. We believe 2015 will be a more telling year as a larger number of providers

will have had a full year of Medicaid expansion experience.

Expected Impact Of Revised Criteria

Our 2015 rating expectations reflect our view of current credit trends and the operating environment for the health

care industry. These comments exclude the anticipated impact of our revised criteria, which were released Dec. 15,

2014, and which we expect could result in rating changes on up to 25% of our stand-alone hospital credits, mostly by

one notch. We will continue to report rating actions monthly, and indicate during the year whether rating changes are

a result of credit quality, revised criteria, or both.

Table 1

2014 Rating Changes - Upgrades

Ratings

Obligor State To From Outlook

Chattahoochee Valley Hospital Society AL BB+ BB- Stable

Citrus Valley Health Partners CA BBB- BB+ Positive

Sharp Healthcare CA AA- A+ Stable

Woman's Hospital Foundation LA A- BBB+ Stable

Children's Memorial Hospital IL A A- Stable

Norman Regional Health System OK BBB- BB+ Stable

Lewistown Hospital PA AA BBB- Stable

Archbold Medical Center GA A+ A Stable

Northfield Hospital MN BBB BBB- Stable


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Table 1

2014 Rating Changes - Upgrades (cont.)

Rex Healthcare NC AA- A+ Stable

Delnor Community Hospital IL AA- A+ Stable

UC Health OH A- BBB+ Stable

John C. Lincoln Health Network AZ A- BBB+ PositiveStanly Health Services NC A+ BBB+ Stable

St. Peter's Hospital NY A+ A Stable

Scripps Health CA AA AA- Stable

Mercy Regional Health Center Inc. and Affiliates KS A+ A Stable

Deaconess Health System, Inc. IN A+ A Stable

Peterson Regional Medical Center TX BBB BBB- Stable

Vail Valley Medical Center CO A A- Stable

Overlake Hospital Medical Center WA A A- Stable

Texas Health Resources TX AA AA- Stable

St. John Health System OK AA A+ Stable

Willis-Knighton Health System LA A+ A Stable

Valley View Hospital CO A- BBB+ Stable

Winchester Hospital MA A- BBB+ Stable

BRCH Corporate Obligated Group FL BBB BBB- Stable

Nanticoke Memorial Hospital DE BBB- BB+ Stable

Sherman Health IL A BBB Stable

St. John's Medical Center WY BBB+ BBB Stable

Touro Infirmary LA A+ BBB Stable

Howard Young Health Care Inc. WI A BBB+ Stable

Ministry Health Care, Inc. WI AA A+ Stable

St. Barnabas Corporation NJ A- BBB+ Stable

Holy Spirit Hospital PA A BBB+ Stable

Memorial Health System of East Texas TX BBB BBB- Stable

Sky Lakes Medical Center OR A- BBB+ Stable

Hawaii Pacific Health HI A A- Stable

Trinitas Regional Medical Center NJ BBB BBB- Stable

Catholic Medical Center NH A- BBB+ Stable

Community Foundation of Northwest Indiana Obligated Grp IN A A- Stable

Data as of Dec. 31, 2014.

Table 2

2014 Rating Changes - DowngradesRatings

Obligor State To From Outlook

Centegra Health System IL BBB+ A- Negative

St. Josephs Hospital Health Center NY BB BB+ --

North Mississippi Health Services MS AA- AA Stable

Northern Inyo County Local Hosp Dist CA BB+ BBB- Negative


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Table 2

2014 Rating Changes - Downgrades (cont.)

Summit Healthcare Regional Med Ctr AZ BBB BBB+ Negative

PeaceHealth WA A A+ Negative

Halifax Hospital Medical Center Obligatged Group FL BBB+ A- Negative

Hopkins County Hospital District TX BB BB+ NegativeOconee Regional Medical Center GA CCC B Negative

Great Plains Regional Medical Center OK BB BB+ Stable

Roger Williams General Hospital RI B+ BB- Stable

SSM Health Care System MO A+ AA- Negative

Daughters of Charity Health System CA B- BBB- Watch Neg

Heritage Valley Health System PA A+ AA- Negative

Lucile Salter Packard Childrens Hospital CA AA- AA Negative

Tuomey Healthcare System SC CC CCC Negative

Centegra Health System IL BBB BBB+ Stable

Oak Valley Hospital District CA BB BB+ Negative

Lifespan Obligated Group RI BBB+ A- Negative

Newport Hospital RI BBB+ A Stable

Mississippi Baptist Health System MS BBB+ A- Stable

Providence Health and Services WA AA- AA Negative

Lake Region Healthcare Corporation MN BBB- BBB Negative

Oneida Health System NY BB+ BBB- Negative

Crozer Chester Medical Center PA BB BBB- Stable

Lowell General Hospital MA BBB BBB+ Negative

Good Shepherd Medical Center TX BB+ BBB+ Negative

San Antonio Community Hospital CA A- A Negative

King's Daughters Medical Center KY BBB A Negative

Baptist Memorial Healthcare Corporation TN A AA- Stable

Arnot Ogden Medical Center NY BBB+ A- Negative

St. Luke's Health System ID A- A Stable

Reading Health System PA AA- AA Stable

North Oaks Health System LA BBB- BBB Stable

Southwest Mississippi Regional Medical Center MS BB BBB- Negative

National Jewish Health CO BB+ BBB- Stable

Covenant Health System Obligated Group NH A- A Stable

University Medical Center Cor poration AZ BBB BBB+ Negative

Shands Teaching Hospital & Clinics FL A- A Stable

Floyd Memorial Hospital & Health Ser vices IN BBB A- Negative

Tor rance Memorial Hospital Medical Center CA BBB+ A Sta ble

Wake Forest University Baptist Medical Center NC A A+ Sta ble

Good Shepherd Medical Center TX BB- BBB+ Watch Neg

Huntington Memorial Hospital CA A A+ Negative

Catholic Health Initiatives CO A A+ Negative

Daughters of Charity Health System CA CCC B- Negative


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Table 2

2014 Rating Changes - Downgrades (cont.)

Data as of Dec. 31, 2014.

Related Criteria And Research

Related Criteria

U.S. Not-For-Profit Health Care Outlook Remains Negative Despite A Glimmer Of Relief , Dec. 17, 2014

USPF Criteria: U.S. Not-For-Profit Acute-Care Stand-Alone Hospitals, Dec. 15, 2014

General Criteria: Group Rating Methodology, Nov. 19, 2013

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subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or

affirmation of, a Credit Rating or Rating Outlook.


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u.s. not-for-profit health care sector's year-end review indicates pressures from 2014 keep the...

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