S&P holds hospital sector at stable amid continuing credit strains


The lingering effects of federal aid should help not-for-profit hospital ratings weather the COVID-19 pandemic’s wounds even as labor shortages and other strains persist through 2022, S&P Global Ratings said.

“Our view remains stable as the sector continues to weather the pandemic well — albeit with the benefit of significant federal aid,” S&P said in its report “Outlook for U.S. Not-For-Profit Acute Health Care: A Booster May Be Needed” published Thursday.

“We expect that healthy balance sheets, demand for services, and improved revenue yield will continue to support hospitals. But there are operating headwinds given significant ongoing expense and revenue pressures likely to continue over the next year,” the healthcare team of Suzie Desai, Stephen Infranco, Cynthia Keller, Anne Cosgrove, Patrick Zagar, and Alexander Nolan said.

Healthcare workers treat a patient on the Covid-19 ICU floor of the UMass Memorial Hospital in Worcester, Massachusetts, in December.

Bloomberg News

S&P had shifted the outlook to negative in March 2020 as pandemic threats accelerated and the impact on margins was uncertain, and affirmed the negative view in January 2021. S&P moved the sector’s outlook back to stable in June as hospital balance sheets recovered.

Healthy balance sheets, ongoing emergency funds, effective leadership in managing operations through the pandemic and excepted demand for service drive the stable outlook but operating performance through the year may show uneven results.

“While we expect operating margins to be weaker in 2022 for many providers, compared to 2021, we believe that most organizations should be able to navigate these challenges given the above-mentioned supporting credit factors,” S&P said.

The pandemic continues, and is intensifying for hospitals in particular with the highly contagious omicron variant, hard on the heels of delta, filling wards with COVID-19 patients.

Some ratings could face pressure depending on the severity and duration of operating pressures, particularly for weaker credits or those with less margin or balance sheet flexibility at their current rating.

S&P expects the divide between stronger and weaker credits to grow and potential federal and legislative policy actions loom large with the ability to either aid or hinder hospital goals.

Many hospitals early in the pandemic put elective procedures on hold either voluntarily or under local public health mandates to deal with growing cases. The new variant is again prompting a halt to some hospital elective services.

While hospitals have learned to “co-exist” with COVID-19, ongoing case surges and the potential for new variants with uncertain demand on hospitals may strain revenues.

“Even if this does not become a widespread issue, ongoing waves of COVID-19 will mean increased spending on testing and protective equipment,” S&P wrote. The development of new treatment therapies offers hope that those pressures could ease.

The national labor crisis is being felt across the economy but it’s particularly acute for healthcare.

Labor expenses and shortages driven by a tired workforce, those retiring or leaving the sector for other higher paid jobs or over vaccination mandates, and quarantined or ill employees pose the biggest near-term risk for most providers, S&P said. Inflationary costs for equipment are further fueling expense woes.

Labor accounts for more than half an organization’s annual expenses “so even minor disruptions can be costly,” S&P said. “The ability to absorb higher staffing and labor expenses is a key area of credit focus. Those providers in already tight labor markets could be even further pressured.”

Hospitals also face market-driven uncertainty.

On the capital front, low interest rates and access to debt have provided hospitals with flexibility through refundings or the ability to establish new credit lines to serve as a liquidity buffer.

“If interest rates rise, access to additional funds may be more difficult and less cost efficient, limiting the flexibility many providers have benefited from for many years,” S&P said.

S&P also expects capital spending to accelerate as providers catch up on deferred spending and focus on long-term strategies to address consumer demands including ambulatory care and expanded accessibility and that form of spending could limit reserve growth.

The median operating margin dropped to 1.6% in 2020 from 2.3% in the previous two years but that figure counted federal relief. It landed at a negative 2.4% when not counting non-recurring revenues.

Federal relief packages provided $186.5 billion in aid of which $149 billion had been distributed at the end of December. While more limited in size, hospitals will continue to benefit from some waning relief through the year from Federal Emergency Management Agency distributions and rural grants from the American Rescue Plan Act, and additional provider relief.

Downgrades and upgrades through 2021 started to even out around 20 each and many negative outlooks were revised to stable.

Fitch Ratings last month assigned a neutral outlook for the sector while Moody’s Investors Service assigned a negative outlook to the NFP and Public Healthcare sectors. They cited growing labor expenses as well as rising supply costs due to shipping delays all pressure hospitals as key outlook considerations.

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