Nonprofit hospitals typically have strong liquidity relative to debt repayment obligations and business risk, but that is beginning to change as investment losses and rising expenses are eroding financial reserves, according to a Jan. 10 report from Fitch.
Balance sheets are expected to hit pre-pandemic levels after financial reserves peaked in 2021, and lower liquidity and operating margins could negatively affect credit profiles for hospitals. Last year the median days' cash on hand was 260, but that has dropped with market declines.
"Operating margins have compressed over the past year due to cost inflation, particularly staffing and weaker liquidity will mean operations may have even less flexibility to address higher expenses," Fitch noted in the report. "While cashflow generation may mitigate portfolio declines and bolster key leverage metrics, the expectation of continued expense pressures in 2023 may constrain cash flow generation. Health systems with comparatively weaker balance sheets for the rating category are more likely to face negative rating pressure in the current environment."
The nonprofit hospitals with higher ratings typically have stronger balance sheets and cash to adjusted debt of 249.1 percent for 'AA' ratings, compared to 102.3 percent for 'BBB' ratings. The report also addressed alternative investments.
"While alternative investments can be part of a wider investment strategy, non-fixed-income asset classes have increased as a percentage of highly rated issuer portfolios over the past few years in the search for yield," the report states. "An aggressive portfolio allocation is likely to result in more balance sheet volatility in a stressed economic environment."