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AzHFMA 2019 Fall Conference U.S. Not-For-Profit Health Care Sector Outlook, Perspective and Rating Methodology
Martin Arrick, Managing Director
September 12, 2019
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Medians: Stable Overall
• All margins improved in 2018 compared to 2017.
• Debt service and operating lease adjusted coverage ratios have remained very stable within a tight corridor for years despite some margin volatility.
• Steady decline in debt service as a percent of revenue.
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Operating margins
Balance sheet ratios• With few exceptions, balance sheet metrics are stable to slightly
improving.
• Average age of plant rising, but capital spending still remains well above depreciation expense.
• Pension funding improved with declining discount rates.
Rating / outlook trends • Rating distribution is fairly stable, although there are slight shifts at the far ends of the rating spectrum.
• The vast majority of outlooks are stable.
• The absolute number of rating changes has been declining since 2016 and is expected to flatten between 2018 and 2019.
• Rating changes due solely to implementation of revised healthcare organization criteria totaled 27.
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Seven Year Trend Of Select Operating Ratios
5
-
1.0
2.0
3.0
4.0
5.0
6.0
2012 2013 2014 2015 2016 2017 2018
Excess margin (%) Maximum annual debt service coverage (x) Operating margin (%) Debt burden (%)
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Seven Year Trend Of Select Balance Sheet Ratios
6
-
50.0
100.0
150.0
200.0
250.0
2012 2013 2014 2015 2016 2017 2018
Days' cash on hand Unrestricted reserves/long-term debt (%)
DB pension funded status (%)* Long-term debt/capitalization (%)
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Not-for-Profit Acute Health Care Rating Distribution Three Year Glance
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0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
AA+ AA AA- A+ A A- BBB+ BBB BBB- S.G.
August 2019 June 2018 June 2017
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Not-For-Profit Health System vs. Stand-Alone Rating Distribution
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As of August 15, 2019 for all outstanding HC ratings. S.G.--speculative grade.
0%
5%
10%
15%
20%
25%
30%
AA+ AA AA- A+ A A- BBB+ BBB BBB- S.G.
Stand-alones Systems
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Not-for-Profit Acute Health Care Outlook Distribution Three Year Glance
8As of August 15, 2019, June 22, 2018, and June 30, 2017, for all outstanding HC ratings.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Stable Positive Negative
August 2019 June 2018 June 2017
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Rating Actions Declining
0
20
40
60
80
100
120
140
2019* 2018* 2017 2016 2015* 2014 2013 2012 2011 2010 2009
Upgrades Downgrades Upgrades solely due to revised criteria* Downgrades solely due to revised criteria*
Data represents all ratings reviewed including some with multiple rating actions. *"U.S. And Canadian Not-For-Profit Acute-Care Health Care
Organizations" criteria published on March 19, 2018, and "U.S. Not-For-Profit Acute-Care Stand-Alone Hospitals" criteria published on Dec. 15, 2014.
Year-to-date 2019 through August 15, 2019.
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Current Perspectives
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Stability Amidst Ongoing Shifts and Evolution of the Industry
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Stabilizing operating margins
Continued balance sheet
Strength
Benefits from mergers and acquisitions;
diversifying joint ventures
Adaptive management
teams
Contributors to Credit Strength and Stability
Underlying Dynamics Threatening Stability
Potential economic recession
Increased traction from nontraditional competitors
Threats to the ACA &
associated Medicaid
expansion
Heightened cost &
revenue pressure, in part due to
aging population
Continued federal & state
legislative action, also
lack of quality & price
transparency
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Current Methodology forU.S. Acute Care Hospitals and Health Systems
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Criteria Reference: “U.S. and Canadian Not-For-Profit Acute Care Health
Care Organizations”, published March 19, 2018
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$36.0 mm
$44.0 mm
$44.6 mm
$56.8 mm
$59.0 mm
Huron Regl Medical Ctr,SD
Ryder Memorial Hosp,PR
Great Plains ReglMedical Ctr, OK
Nicholas H. NoyesMemorial Hosp, NY
Grencoe Regl HlthServices, MN
$17.5 bb
$23.0 bb
$22.3 bb
$27.7 bb
$72.3bb
Trinity, Health, MI
Providence St.Joseph, WA
Ascension HealthAlliance, MO
CommonSpiritHealth, IL*
Kaiser Health, CA
Rated acute care credits range in revenue size and types
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Bottom 5 by Operating Revenue ($
Millions)
Top 5 by Operating Revenue ($ Billions)
Examples of Rated Credits (AMCs, Systems, Community providers, Specialty
hospitals, Hospital districts, Children’s hospitals)
Operating revenue size ranges from $35 million to $75
billion1
1 Total Operating Revenues for 2017; * Common Spirit result is pro-forma of Dignity Health and Catholic Health Initiatives; Bottom 5 revenue hospitals
exclude hospital districts.
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Financial Profile
Enterprise Profile 1 2 3 4 5 6
Extremely
strong
Very
StrongStrong
Adequat
eVulnerable
Highly
vulnerable
1 Extremely strong aaa aa+ aa- a bbb+/bbb bb+/bb
2 Very strong aa+ aa/aa- a+ a- bbb/bbb- bb/bb-
3 Strong aa- a+ a bbb+/bbb bbb-/bb+ bb-
4 Adequate a a/a- a-/bbb+ bbb/bbb- bb b+
5 Vulnerable bbb+ bbb/bbb- bbb-/bb+ bb bb- b
6 Highly vulnerable bbb- bb bb- b+ b b-
Our not-for-profit healthcare ratings cover nearly all of the rating spectrum, from ‘AA+’ to ‘B-’ and below.
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This grid is used for all Enterprise Group ratings in USPF.
CCC category and below governed by separate criteria.
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Initial
Indicative
Rating
Enterprise profile
• Economic fundamentals 20%
• Industry risk 20%
• Market position 50%
• Management and governance 10%
• Financial performance 40%
• Liquidity and financial flexibility 30%
• Debt 30%
Financial profile
• Legal structure/pledge
1 2 3 4 5 6
1
2
3
4
5
6
MATRIX
• Overriding factors and caps• Holistic analysis
• Rating above the sovereign• Group rating methodology• Government-related entity
Final Issue Credit
Rating
Our ratings consider enterprise and financial profile factors.
Final
Issuer Credit
Rating
Indicative
Rating
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Assessments for each factor range from 1 (strongest)
to 6 (weakest) based on a combination of
quantitative and qualitative factors.
Economic fundamentals
(20%)
Industry risk
(20%)
Marketposition
(50%)
Management and governance
(10%)
Enterprise profile assessment
• Demographic profile• Geographic diversity
• Economic cyclicality• Competitive risk and
growth – All acute healthcare organizations are ranked as strong
• Market share, competition and demand
• Medical staff• Payer mix• Clinical
quality
• Strategic positioning • Risk management• Organizational
effectiveness• Governance
• Diversity• Integration and
scale• Market specific
considerations
Stand-Alone Hospitals Health Care Systems
The enterprise profile assessment evaluates the operating environment and incorporates broad industry and organization-specific factors.
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Financial performance
(40%)
Liquidity and financial flexibility
(30%)
Debt(30%)
Financial profile assessment *
• Total operating revenue• Earnings before depreciation,
interest and amortization (EBIDA) margin
• Operating margin• Excess margin• Maximum annual debt service
coverage• Lease-adjusted MADS coverage
• Average age of plant• Capital expenditures/depreciation
expense• Days’ cash on hand• Unrestricted reserves/long-term debt• Unrestricted reserves/contingent
liabilities
• Debt burden• Long-term debt/capitalization• Contingent liabilities/long-term
debt• Funded status of defined-
benefit pension plan
Assessments for each factor range from 1 (strongest)
to 6 (weakest) based on a combination of
quantitative and qualitative factors.
The financial profile assessment evaluates the financial strength of the healthcare organization.
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* Financial Policies are reviewed but have no
percentage allocation, but can reduce score if
deemed problematic
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Q&A
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Thank you!
Martin Arrick
Managing Director
T: 415.371.5078
Martin.Arrick@spglobal.com
Recent median articles available on www.spratings.com/healthcare select US Public
Finance and then Not-For-Profit healthcare
• "U.S. Not-for-Profit Acute Health Care Ratios: 2018 Medians Show Operating Margin Improvement But Are Otherwise Stable"
• "U.S. Not-For-Profit Acute Health Care Stand-Alone Hospital Median Financial Ratios -- 2018 vs. 2017"
• "U.S. Not-For-Profit Health Care System Median Financial Ratios -- 2018 vs. 2017"
• "U.S. Not-For-Profit Health Care Children's Hospital Median Financial Ratios -- 2018 vs. 2017"
• "U.S. Not-For-Profit Acute Health Care Speculative Grade Median Financial Ratios -- 2018 vs. 2017"
• "U.S. Not-For-Profit Health Care Small Stand-Alone Hospital Median Financial Ratios -- 2018 vs. 2017"
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