not-for-profit healthcare: market trends & outlook …...fitch maintains two outlooks for the...

Not-For-Profit Healthcare:

Market Trends & Outlook

Rating Upgrades and Downgrades – Methodology and Lessons Learned

AzHFMA 2019 Fall Conference

Mark Pascaris, Director

September 12, 2019

• Introduction

• Market Trends and Outlook

• Credit Rating Upgrades and Downgrades: Methodology and Lessons Learned

• Longer Term Perspective – There is Reason to be Optimistic

Agenda and Introductions

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Fitch Maintains Two Outlooks for the Not-For-Profit

Healthcare Industry

2019 Stable Rating Outlook

2019 Negative Sector Outlook

Market Trends and Outlook

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Fitch’s Stable Rating Outlook is based on expectation that management can still extract operating

efficiencies and from the added protection from increased liquidity

Sector’s strong liquidity position provides a good financial cushion to adapt to challenging operating

environment and is expected to keep ratings generally stable for 2019

Continued pressure on reimbursement is expected, via as commercial volumes shift to Medicare as the

population ages, potential weakening of Medicaid reimbursement, commercial payor consolidation, etc.

We expect that rating Upgrades and Downgrades will be approximately equal

Providers still possess the ability to extract further clinical efficiencies, as management teams continue to push

supply chain savings, revenue cycle management, judicious capex, and ultimately clinical care redesign

We believe the sector can absorb some compression/volatility in profitability due to strong balance sheet

positions of many rated providers

Market Trends and Outlook: 2019 Stable Rating Outlook

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Fitch maintained its Negative Sector Outlook, as expectations for a more challenging operating

environment have been mostly deferred, not diminished

External headwinds old and new

Continued tightening of Medicare and Medicaid reimbursement reflecting increased penalties under value-

based reimbursement and expansion of bundled payments

Managed care contract negotiations are likely to be increasingly antagonistic

Providers demand higher rate increases to offset higher Medicare and Medicaid volumes

Cost shift from employers to employees

Continued consolidation among commercial payors

Expense pressures from tight labor markets, increased pharmaceutical and implant cost

Global economic uncertainty

Consumerism, payor mix erosion, low commercial rate increases and exposure to risk-based contracting

‘Non-traditional’ competitors

Piecemeal dismantling of ACA (e.g. repeal of individual mandate, work requirements)

Market Trends and Outlook: 2019 Stable Rating Outlook

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Credit Rating Upgrades and Downgrades: Methodology and Lessons Learned

Not-for-Profit Hospitals and Health Systems Ratings Criteria in January 2018 (updated Criteria in May

2019)

Three broad areas of Criteria analysis:

Revenue defensibility: market share and market quality

Operating risk profile: expectations of ability to generate cash flow (operating EBITDA %) and Capex needs

Financial profile: forward-looking expectations of cash-to-adjusted debt and net adjusted debt-to-adjusted

EBITDA in a stress case

~Half of hospital system ratings were affirmed after Criteria rollout, and majority (~80%) remained

within a notch

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Keys to success in operating in a dynamic reimbursement environment

Demonstrated ability to improve and sustain high level of quality results

Understanding the dynamics of a local patient and payor population and their respective healthcare needs

Aligning physician productivity models with successful outcomes of the hospital system

Successful continuous improvement process to increase efficiency and reduce total cost of care

Understanding that consumers will be increasingly savvy about healthcare choices and realization that this

will lead to a new competitive dynamic in the industry (i.e., the “uberization” of healthcare)

Ability to operate in multiple reimbursement worlds simultaneously is critical to financial health

Understanding capital investments needs will evolve over time

Having a strong balance sheet always helps

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Credit Rating Upgrades and Downgrades: Methodology and Lessons Learned

Fitch’s Longer Term Perspective: There is good news

Stein’s Law: “Trends that cannot continue, don’t”

Recent losses are potentially one-time in nature• Forays into health exchanges or provider sponsored health plans (fixed)• Less urgent need for inpatient beds (capital savings)• Significant capital and operational spend on EMR over

Aging population – for organizations that are able to managed to break-even or better, they will

have a growing, heavy utilization population that will absorb significant levels of fixed costs

Better prepared management teams• Seen this before with Prospective Payment System, BBA, and Sequestration• Lean processes and improvement initiatives now part of annual efforts• Fitch sees pockets of success

• Children’s hospitals• Large stand-alone facilities• Super-regional systems with significant market concentration

2018 median data support a “leveling” of performance beginning in fiscal 2018!3/26/2019: “Beyond the One Year Outlook: Ample Reason to be Optimistic”

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• Mark Pascaris, Director

• Mark.pascaris@fitchratings.com

• +1 312-368-3135

Contact

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Acute Care Rating Distribution

~220 Hospital and Hospital Systems

Median Rating: ‘A’

US Nonprofit Healthcare Portfolio

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Hospital & Hospital System Financial Performance

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Hospital & Hospital System Financial Medians

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fitchratings.com

@fitchratings

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