The three main credit rating agencies —Fitch Ratings, Standard & Poor's and Moody's Investors Services —have recently released their annual hospital median reports providing insight into how the Patient Protection and Affordable Care Act is affecting the industry.
The following trends stand out as having significant financial impact on the hospital sector, according to an analysis by Kevin Laidlaw, a vice president and underwriter for the investment advisory group Lancaster Pollard.
1. Downgrades are outpacing upgrades across the board. All three credit rating agencies have noted a decline in income statement strength in the hospital market. "Both highly rated and non-investment grade hospitals felt the pain as Fitch observed a decline in operating profitability across all rating categories for the first time in six years," Mr. Laidlaw writes.
2. Revenue growth has hit a record low. Moody's has reported a 3.9 percent revenue growth rate, an all-time low. There are numerous forces hurting hospital revenue, including declining inpatient volumes, increased exposure to Medicaid and the end of one-time enhancement such as the Medicare rural wage settlement, according to Mr. Laidlaw.
3. Expenses are growing faster than revenues. As they face numerous financial pressures, hospitals are having difficulty identifying ways to decrease expenses, having already picked much of the low-hanging fruit, Mr. Laidlaw writes. Additionally, personnel costs stemming from PPACA implantation, the transition to ICD-10 and other necessary changes are driving up expenses.
4. Strong liquidity metrics have partly compensated for negative profitability. Moody's has reported the median cash and investments balance rose to 11 percent in 2013. "Other positives included stable leverage metrics, a slight increase in days in accounts receivables and improved cash-to-debt ratios," Mr. Laidlaw writes. "A strong stock market, aggressive revenue cycle management and decreased capital expenditures have contributed to this improvement."
5. Mergers and acquisitions are driving up ratings, despite financial pressures in the sector. The median rating in Fitch's portfolio has risen from "A-" to "A," in spite of the many challenges hospitals face financially related to healthcare reform. This shift is mostly because of upgrades that take place when a higher-rated hospital acquires a lower-rated one.