azhfma 2019 fall conference u.s. not-for-profit health care … · 2019-09-16 · not-for-profit...

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.

2

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.



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 (%)



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 (%)



Not-for-Profit Acute Health Care Rating Distribution Three Year Glance

7

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



Not-For-Profit Health System vs. Stand-Alone Rating Distribution

14

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



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



9

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.



Current Perspectives

9



Stability Amidst Ongoing Shifts and Evolution of the Industry

29

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



Current Methodology forU.S. Acute Care Hospitals and Health Systems

11

Criteria Reference: “U.S. and Canadian Not-For-Profit Acute Care Health

Care Organizations”, published March 19, 2018



$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

12

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.

https://www.logolynx.com/images/logolynx/af/af110b5e758bedac904d0614a38dbd6a.jpeg



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.

13

This grid is used for all Enterprise Group ratings in USPF.

CCC category and below governed by separate criteria.



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

14



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.

15



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.

16

* Financial Policies are reviewed but have no

percentage allocation, but can reduce score if

deemed problematic



Q&A

17



Thank you!

Martin Arrick

Managing Director

T: 415.371.5078

[email protected]

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"

31

mailto:[email protected]

http://www.spratings.com/healthcare

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https://app.ratings.spglobal.com/B903kT2SF000502M0pog8br

https://app.ratings.spglobal.com/gp0p5Fg0b209MS0rT003l28

https://app.ratings.spglobal.com/Lb52SM0093q20Tmp80g0r0F

https://app.ratings.spglobal.com/K00b5TM00g2r2nrp839F0S0

https://app.ratings.spglobal.com/NM00sTbr000982S3oF50p2g



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azhfma 2019 fall conference u.s. not-for-profit health care … · 2019-09-16 · not-for-profit...

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