Nonprofit Hospitals Get Negative Public Finance Ratings

A greater number of public entities received finance ratings downgrades than upgrades for the first time since 2013, according to New York City-based credit rating agency Fitch Ratings. Nonprofit hospitals, which have experienced upheavals in the operations amid the coronavirus epidemic, have an uncertain future as the crisis lingers.

Overall, Fitch Ratings issued 100 upgrades and 181 downgrades across several sectors, compared with 173 upgrades and 105 downgrades in 2019. Within the hospital sector, however, only five organizations were upgraded, compared with 22 receiving downgrades.

Part of the downgrades reflect hospitals needing to turn from profitable elective surgeries, which have been limited or banned during the coronavirus crisis, in favor of focusing resources on managing the pandemic. Fitch Ratings attributed 13 downgrades, two Negative Rating Outlook designations and 17 Negative Watch designations within the hospital sector to the coronavirus.

Analysis from Fitch Ratings does not indicate hope for a rebound in the near term. At the end of 2020, Fitch assigned 82 percent of the sector a Stable Rating Outlook based on the revised ratings, along with nine percent that had a positive outlook and eight percent that had a negative outlook.

The lack of anticipated rebound in 2021 reflected Fitch’s analysts’ thinking that the sector will continue to face financial challenges through at least the first half of the year, as coronavirus infection rates are expected to remain high and higher-margin elective procedures will continue to be limited.

In the longer term, the hospital sector will continue to experience a weakening payor mix, including greater reliance on lower-revenue self-pay and Medicaid clients. At the same time, hospital expenses have jumped, reflecting an increase in lower-margin procedures and services.

The greater financial uncertainty may result in an increase in merger and acquisition activity during second-quarter 2021, according to the Fitch analysis.

While the nonprofit hospital sector was rocked by the downgrades, other nonprofit sectors did not escape adversity. Among not-for-profit life plan communities, 20 entities were downgraded while none were upgraded. Two of the downgrades, along with six Negative Rating Outlooks and one Negative Watch were influenced by the coronavirus epidemic. At the end of the year, 83 percent of this sector had a Stable Rating Outlook, three percent had a Positive Ratings Outlook, and 14 percent had a Negative Rating.

For 2021, Fitch analysts believe this sector will remain stable, as operating cost pressures throughout the first half of the year will be offset by favorable demographic trends and solid residential real estate markets. Investments in the independent living unit sector should meet growing demands.

Fitch’s analysts are more dubious regarding the future of higher education and nonprofit institutions. Only one student-supported organization was upgraded, while 22 were downgraded in 2020. Fitch attributed 14 downgrades, 16 Negative Rating Outlooks and one Negative Watch to the impact of the coronavirus.

Fitch analysts indicated this sector’s fortunes would be “worsening” due to drops in student-driven revenue such as suspended athletics programs, and little expectation of increases in state funding. Additionally, overall enrollment will likely be disrupted, and the picture for long-term trends is not positive, whether due to inability to finance education or a generation turning away from education that focuses on concentrations of students.