The prolonged positive response to negative pressures will result in balanced credit upgrades versus downgrades in the nonprofit healthcare sector for 2016 and into 2017, while downgrades will only slightly exceed upgrades in the for-profit sector, according to a recent Standard & Poor's Ratings Services webcast.
Here are 11 additional thoughts on healthcare's outlook from S&P.
Nonprofit sector
1. Last September, S&P revised its outlook on the nonprofit healthcare sector to stable from negative. At that time, the credit rating agency said it expected nonprofit providers' operational strength to drive the sector until at least the end of 2016.
2. S&P maintained its stable outlook on the nonprofit sector for 2016.
3. Nonprofit hospitals have received a boost from Medicaid expansion and the insurance exchanges under the Affordable Care Act, which have helped improve volumes and payer mix across the sector.
4. Balance sheets remain a key credit strength for the nonprofit sector. "They're really at an all time high generally across the board," said Kevin Holloran, senior director of U.S. public finance ratings not-for-profit healthcare team at S&P.
5. Merger and acquisition activity has generally been positive for the nonprofit sector. Mr. Holloran said opportunistic M&A, where large organizations are picking up smaller ones, has been extremely beneficial to the smaller hospitals and health systems. Opportunistic M&A is expected to continue in the nonprofit sector.
6. Although there has been a rebound in the nonprofit sector, negative pressures still remain. Some of the organizations S&P deals with are having difficulty with poor IT installation, weaker patient volumes and the cost of absorbing physician practices, according to Mr. Holloran.
7. Looking at 2016 and beyond, "The strongest hospitals and health systems are likely to just hold existing margin and reserve levels, while weaker providers will likely continue to see operating margin and cash flow erosion and eventually balance sheet pressure," according to S&P.
For-profit sector
8. S&P's outlook on the for-profit sector is stable, and it expects credit quality to be stable across all for-profit services. Unlike S&P's discussion of the nonprofit sector, which only included hospitals, the for-profit sector discussion covered hospitals, behavioral health, post-acute care, clinical labs, healthcare staffing companies, ambulatory surgery and dental services.
9. There's a shift of inpatient to outpatient care that is occurring in the for-profit sector. "This is something we've seen for a very long time in the industry," said David Peknay, director of the corporate ratings healthcare team at S&P. However, the shift is accelerating.
10. As expected, the ACA's impact on the for-profit sector is leveling off.
11. Mr. Peknay noted that although there are fewer uninsured Americans due to the ACA, hospitals are struggling with collections because of the increasing popularity of high deductible health plans. This trend was highlighted by Franklin, Tenn.-based Community Health Systems when it significantly increased allowance for doubtful accounts, according to Mr. Peknay.
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