Fitch Ratings issued a strong "AA-" median rating for nonprofit children's hospitals due to various factors, such as the hospitals' unique credit profile.
Aspects of this unique credit profile include robust liquidity, solid operating profitability, unique market positions, robust philanthropic backing and specialized clinical services, Fitch said in a recent report.
While the hospitals' median rating is strong, these organizations still face operating challenges, such as high exposure to Medicaid funding, which have led to some mild profitability contraction in fiscal year 2016, the ratings agency said.
Overall, Fitch reported median operating EBITDA margin of 12.6 percent for nonprofit children's hospitals in fiscal year 2016. That compares to 14.1 percent the year prior. Fitch said median debt service coverage by EBITDA also decreased for nonprofit children's hospitals, from 7.8x in fiscal year 2015 to 6.5x in fiscal year 2016.
The ratings agency attributed these results to "a tapering off of volume and funding growth following Medicaid expansion, weaker investment returns in fiscal [year] 2016 and continued capital outlays that have generally outpaced the broader acute care sector."
Although cash flow tightened for nonprofit children's hospitals in fiscal year 2016, these organizations still saw median days cash on hand improve to more than 330 days, marking the fourth consecutive year of improvement for this measure, Fitch said. Fitch said median cash to debt also increased, to nearly 270 percent, for nonprofit children's hospitals.
"Children's hospitals' high exposure to Medicaid and supplemental funding, and their inherent vulnerability to governmental funding cuts, constitutes the primary credit concern for this sub-sector of the industry," Fitch Director Emily Wadhwani said in the report. "Proposed reductions to Medicaid and other supplemental healthcare funding cuts currently contemplated in Congress are likely to pressure these hospital providers over the longer term if enacted."