S&P Global Ratings published revised final criteria for U.S. and Canadian nonprofit acute hospitals and health systems March 19.
The criteria, effective immediately, outlines S&P's methodology for ratings assignments in the nonprofit healthcare sector.
Ken Gacka, senior director and analytical manager with S&P, says the revision ultimately represents a shift from broad, general criteria to more transparent criteria. This means S&P Global's healthcare analysts score enterprise and financial attributes that factor into ratings. Attributes include economic fundamentals, industry risk, market position, management and governance, financial performance, liquidity and financial flexibility and debt.
"What we have in the [revised] criteria is details on how we arrive at different assessment levels for each of those attributes," says Mr. Gacka. "We're providing more transparency around what we mean at the different assessment levels, but also, importantly, providing flexibility for analysts to appropriately capture the credit story and our forward looking view of the credit."
Under the new rating approach, S&P Global provides guidance and examples on what it considers "extremely strong" to "highly vulnerable" on a six-point scale for key credit attributes. Factors are subsequently aggregated into overall scores.
"The criteria include a matrix of the final scores so that there's no ambiguity on where your metrics fall out. In the past, you wouldn't have had that type of information for health systems," Mr. Gacka says.
Overall, he says S&P Global still considers the same attributes important to credit quality as it always has, but the revised criteria simply offers more clarity around how the ratings agency will assess attributes based on numbers or, in some cases, characteristics which are described. It also provides consistency with revised criteria S&P Global published for standalone hospitals in 2014.
Therefore, S&P Global does not expect standalone hospitals to see any significant changes in their ratings as the revised criteria builds on the previously published criteria for standalone hospitals. But it does expect roughly 30 percent of health systems — which include organizations having three or more hospitals and revenue in excess of $1.5 billion — to see some minor changes, mostly "plus or minus a notch," says Mr. Gacka. "The systems were rated by older, general criteria and as a result may experience a greater impact than standalone hospitals," he says. Additionally, S&P Global expects the revised rating criteria have a more noticeable impact on nonprofit hospital district ratings.
Specifically, the ratings agency expects 60 percent of hospital districts to be downgraded up to three notches, 10 percent of districts to see an upgrade and 30 percent of hospital districts to remain unchanged.
The revised criteria is effective immediately, but S&P Global will not take any actions right away. Mr. Gacka says the ratings agency instead will continue reaching out to management teams at healthcare organizations for meetings and calls so S&P has the organization's full story and facts before making any credit specific presentations to a rating committee under the new criteria.
"We take this very seriously, and we want to make sure we have the opportunity to speak with management … before we apply a new methodology. The conversation [is] an important piece of our understanding of the credit," he says.
"We want to make sure from the hospital's perspective this is business is usual and [that they] understand why we're making the changes, if any, to ratings." Mr. Gacka indicated he expects nonprofit providers will have ratings reviewed by June 2019.
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