The Healthcare "Three R's":
Regulation - Reform - Reimbursement
Rating Agency Outlook
Kaufman Hall and Associates
August 22, 2014
Discussion Agenda
•
•
•
•
Background and Methodology
Standard & Poor’s Medians
Moody’s Medians
Fitch Medians
1
RATING AGENCY: BACKGROUND
AND METHODOLOGY
2
Key Themes from Rating Agencies
• All rating agencies give the health care industry a negative
outlook
• Increasing challenges in preserving profitability – inpatient
volumes pressured, increasing use of high-deductible health
plans, Medicare and other payers with lower than historical
rate increases
• Harder-to-find cost savings
• Uncertainty about the Affordable Care Act
• Focus on management to navigate the changing environment
• Strategic partnerships will continue
3
Why Does a Credit Rating Matter?
• Creditworthy organizations have improved capital market and borrowing
opportunities
– Less restrictive bond covenants
– Access to a wider range of lending institutions
– Avoidance of a debt service reserve fund
• Creditworthy organizations have a lower cost of capital
– A” vs. “BBB” historical interest rate spread range of approximately 75+ bps
– Access to a variety of debt options
• Creditworthy organizations are market consolidators
– Nationwide, organizations with the highest credit ratings have been the most
attractive partners, have excess capital capacity and the lowest cost of capital to
consolidate the market
4
Negative Outlooks Reflect Accelerating
Industry Pressures
“…negative sector outlook reflects the forces of pressure weighing on the sector (lower
reimbursement, suppressed inpatient volumes, higher deductible plans and additional spending
cuts) as it enters this potentially historic period of change”
Fitch, December 11, 2013
“The negative outlook is due to a multitude of factors, including: top line revenue constraints,
the impact of health care reform readiness activities, soft demand, and emerging changes to the
payment environment"
Standard & Poor’s, December 10, 2013
“Our sector outlook for not-for-profit hospitals remains negative reflecting the challenging
operating landscape over the next 12-18 months as patient volumes shrink and revenue growth
slows"
Moody’s Investors Service, November 25, 2013
5
Rating Agency Perspective: Key Drivers
• Economy: unemployment, state budges, healthcare funding
• Utilization: flat to declining industry-wide
• Reimbursement: pressure on rates and what’s reimbursed
• Expenses: vs. revenue growth, continued reduction efforts
• Payer mix: government, commercial, cost shifting
• Physician alignment: investment and operating losses
• Healthcare reform: uncertainty and bi-modal transition period
• New market entrants: private equity, for-profits, insurers,
retail
• Consolidation: search for scale leading to rapid consolidation
6
Credit Ratings Are Influenced by Range of
Factors
Can be influenced
in short-term
Cannot be influenced
in short-term
•
•
•
•
•
•
•
•
•
•
Financial performance, trends, and expectations
Strategic and financial planning
Governance/ management
Market position
Payor mix
Physician relations
Debt and capitalization position
Size and critical mass which mitigate risk
Number of physical locations for diversification
Industry trends and external perception of risk
7
Distribution of Tax-Exempt Healthcare
Ratings
Non-IG
Moody
9%
S&P
27%
10%
Fitch
BBB / Baa
A
49%
35%
6%
15%
47%
28%
0%
AA / Aa
8%
41%
20%
40%
25%
60%
Non Investment Grade
80%
100%
Investment Grade
Moody’s
B3
B2
B1
Ba3
Ba2
Ba1
Baa3
Baa2
Baa1
A3
A2
A1
Aa3
Aa2
S&P, Fitch
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
AA
Note (1): Based on Moody’s most recent not-for-profit healthcare median report published August 2013
Note (2): Based on S&P’s most recent not-for-profit stand-alone hospital median reports published August 2014
Note (3): Based on Fitch’s most recent not-for-profit healthcare median report published August 2014
8
RATING AGENCY –
STANDARD & POOR’S (S&P)
9
Standard & Poor’s
• 2013 ratings published August 13, 2014
• Provides separate ratings for Stand-Alone Hospitals and Health Systems
• The distribution of System ratings continues to be of significantly higher
credit quality than that of Stand-Alone providers, with the majority of
ratings in the 'AA' category and the higher end of the 'A' category, while
the 'A' and 'BBB' categories dominate the stand-alone realm
• In S&P’s opinion, systems remain better positioned than stand-alone
providers to manage and adapt to industry forces, in part, due to the
benefits of revenue and geographic diversity, overall scale, and capability
to attract and retain top-tier physicians and management, all of which
compensate for the systems' slightly weaker financial metrics in 2013
10
Standard & Poor’s Distribution of Ratings
Stand-Alone vs. System Rating Categories
25%
20%
15%
Stand-Alone
System
10%
5%
0%
AA
AA-
A+
A
A-
BBB+ BBB BBB- Spec
11
Standard & Poor’s 2013 System Medians
• The 2013 medians for U.S. not-for-profit health care systems reflect a
decline in operating performance for the first time since 2008 due to
operating expenses that outpaced patient revenue growth.
• Strong investment returns not only helped offset reduced margins, but
they also bolstered many balance-sheet metrics with stronger unrestricted
reserves and improved pension results. Increased balance-sheet strength in
turn enhanced financial flexibility, enabling many health systems to absorb
the impact of changing dynamics in health care delivery and
reimbursement.
12
Standard & Poor’s 2013 System Medians
(continued)
• While revenue in 2013 grew at a faster pace than we expected, with
an overall increase of 5%, expenses rose even more at 7%. This
marks another year of patient revenue growth for systems, although we
find the increase is tied less to volume growth and more to mergers
and acquisitions, increased physician employment, which added
hospital referrals as well as revenue from the owned practices, and
special funding mechanisms such as provider fees and meaningful
use technology funds from the government.
• The growth in expenditures reflects higher operating costs to prepare
for health care reform, including technology investment and
consulting fees, higher physician costs, provider taxes paid, and
increased salaries and pharmaceutical costs.
13
Standard & Poor’s System Profitability
Trends
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2007
2008
Operating Margin
2009
2010
2011
Operating EBIDA Margin
2012
2013
Excess Margin
14
Standard & Poor’s System Liquidity
Trends
Days Cash on Hand
250
200
181
175
154
154
2008
2009
189
194
2011
2012
205
150
100
50
2007
2010
2013
Days Cash on Hand
15
Standard & Poor’s System Rating and
Outlook Actions
System Rating and Outlook Actions
16
14
12
10
2011
2012
2013
8
6
4
2
Downgrades
Upgrades
Negative Outlook
Actions
Positive Rating
Actions
16
Standard & Poor’s System Outlook
•
•
•
•
•
Expects continued compression in operating margins in 2014 due mainly to inpatient
volume decline.
Anticipate nonoperating revenues, specifically investment earnings, will continue to grow,
given that year-to-date investment market performance has remained sound.
See that many cost escalators in 2013 have continued into 2014, including further operating
costs to support infrastructure development, physician employment, joint-venture
relationships, and mergers and acquisitions. These costs are likely to affect next year's
medians as well.
One bright spot may be what we believe is a near-to-medium-term spike in volume from
Medicaid expansion and exchange patients. Under the Affordable Care Act, providers
could see a drop in charity care and bad debt expenses, although there may be some offsetting
increases from patients unable to afford high deductibles and copayments associated with
their new insurance coverage.
In addition, with continued merger and acquisition activity, health systems are creating
opportunities to achieve cost reductions through increased economies of scale and
regional clout.
17
S&P Rated Systems in Maryland
System
Rating
Outlook
Bon Secours Health System
A-
Stable
Johns Hopkins Health System
AA-
Stable
MedStar Health
A-
Stable
University of Maryland Medical System
A-
Stable
Rating as of August 13, 2014
18
Standard & Poor Stand-Alone Medians for
2013 ($ millions)
S&P
S&P
S&P
S&P
S&P
S&P
S&P
S&P
S&P
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
Spec
12
$1,092.8
$1,198.9
16
$760.3
$697.7
60
$480.5
$398.9
49
$407.1
$253.6
60
$295.0
$171.9
39
$282.1
$138.9
46
$160.3
$75.7
42
$175.8
$59.6
38
$127.8
$29.1
Profitability
Operating Margin
Operating EBIDA Margin
5.4%
12.0%
5.7%
12.0%
4.0%
10.9%
2.4%
9.5%
2.3%
9.3%
1.4%
8.2%
1.2%
8.8%
1.0%
8.0%
(2.8%)
4.9%
Debt Position
Debt Service Coverage
Debt to Capitalization
6.3
21.4%
6.0
23.6%
4.9
26.7%
4.4
27.6%
3.4
35.2%
3.3
34.2%
2.5
37.9%
2.6
37.5%
1.7
49.8%
Liquidity
Cash to Debt
Days Cash on Hand (days)
285.1%
393.4
237.0%
307.9
185.8%
290.9
179.1%
245.6
139.0%
191.6
123.3%
187.3
103.9%
161.4
103.1%
127.2
56.6%
95.2
Other
Capital Spending Ratio
Compensation Ratio
152.7%
58.3%
148.1%
56.6%
118.0%
53.7%
127.4%
56.8%
123.5%
57.1%
112.9%
55.7%
99.4%
56.5%
85.5%
56.2%
81.0%
55.2%
Sample Size
Net Patient Revenue
Unrestricted Cash
Medians based on and S&P Stand-Alone Median Ratios for Nonprofit Hospitals for Fiscal Year 2013 (published in 2014).
19
Standard & Poor’s Stand-Alone Hospital
Profitability Trends
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2008
2009
Operating Margin
2010
2011
Operating EBIDA Margin
2012
2013
Excess Margin
20
Standard & Poor’s Stand-Alone Hospital
Liquidity Trends
Days Cash on Hand
250
187
192
198
2010
2011
Days Cash on Hand
2012
2013
200
150
146
152
2008
2009
165
100
50
-
21
Standard & Poor’s 2013 Stand-Alone
Medians
• The 2013 median ratios for stand-alone hospitals were mixed, with weaker
operating margins offset by balance-sheet improvement.
• Balance-sheet measures improved for the most part, with an increase in
unrestricted reserves despite softer operating income as many providers
enjoyed favorable investment returns.
• This is reflected in improved nonoperating income, which has boosted
excess income from a year earlier. However, unrestricted reserves to
operating expenses, as measured by days' cash on hand, was mixed at
some rating levels.
• The growth in nonoperating income also highlights a growing dependence
on nonoperating income, which leaves many providers exposed to
uncertain investment markets.
22
Standard & Poor’s Stand-Alone Hospital
Medians
Distribution of Ratings
80
70
60
50
40
2012
2013
30
20
10
AA
AA-
A+
A
A-
BBB+ BBB
BBB-
Spec
23
Standard & Poor’s Stand-Alone Hospital
Medians
Net Patient Revenue
$1,200
$1,000
$800
2012
2013
$600
$400
$200
$AA
AA-
A+
A
A-
BBB+ BBB BBB- Spec
24
Standard & Poor’s Stand-Alone Hospital
Medians
Operating Margins
6.0%
5.0%
4.0%
3.0%
2012
2013
2.0%
1.0%
0.0%
AA
AA-
A+
A
A-
BBB+ BBB
BBB-
Spec
-1.0%
-2.0%
25
Standard & Poor’s Stand-Alone Hospital
Medians
Operating EBIDA Margins
14.0%
12.0%
10.0%
2012
2013
8.0%
6.0%
4.0%
2.0%
AA
AA-
A+
A
A-
BBB+ BBB
BBB-
Spec
26
Standard & Poor’s Stand-Alone Hospital
Medians
Unrestricted Cash
$1,400.0
$1,200.0
$1,000.0
$800.0
2012 Cash
2013 Cash
$600.0
$400.0
$200.0
$0.0
AA
AA-
A+
A
A- BBB+ BBB BBB- Spec
27
Standard & Poor’s Stand-Alone Hospital
Medians
Days Cash on Hand
$450.0
$400.0
$350.0
$300.0
$250.0
2012
2013
$200.0
$150.0
$100.0
$50.0
$0.0
AA
AA-
A+
A
A-
BBB+ BBB BBB- Spec
28
Standard and Poor’s Contemplated
Updated Rating Methodology
“The criteria establishes a formal framework for performing credit analysis using the same
elements that have long been a part of our analysis and that are routinely discussed in our rating
committees.” – Standard & Poor’s, December 5, 2013
•
•
Basic framework uses a weighted average of an enterprise and financial profile
score
Financial Profile
• Enterprise Profile
– 40%: Financial Performance
– 30%: Liquidity & Financial Flexibility
– 30%: Debt & Contingent Liabilities
– 20%: Industry Risk
– 20%: Economic Fundamentals
– 50%: Market Position
– 10%: Management & Governance
•
After these scores are accumulated, certain positive and negative factors outside the
outlined framework are assessed
– Management strength, close affiliation with strong organizations (ex. AMC with a
University), specialty designations, etc.
29
Preliminary S&P Rating Analysis:
Financial Profile
Sample Hospital
I. Financial Performance
Net Patient Service Revenue ($M)
EBIDA Margin
Operating Margin
Excess Margin
Maximum Annual Debt Service Coverage
Lease-adjusted MADS Coverage
Weight
40%
16.7%
16.7%
16.7%
16.7%
16.7%
16.7%
FY 2011 FY 2012 FY 2013
FY11 to FY13 (weighted)
Value
Score
689.6
5.2%
-0.5%
-2.2%
2.0
1.3
735.2
8.5%
2.2%
0.8%
3.6
2.6
758.2
7.2%
1.0%
4.2%
3.0
1.8
736.4
7.2%
1.1%
1.7%
3.0
2.0
Initial Score:
2
6
4
5
4
5
4.33
II. Assessing Liquidity and Financial Flexibility
Average Age of Plant (yrs)
Capital Expenditures/Depreciation Expense
Cash on Hand (Days)
Unrestricted Reserves/Long-Term Debt
Unrestricted Reserves/Contingent Liabilities
30%
15%
15%
30%
30%
10%
16.1
211.7%
100.4
70.3%
87.7%
11.7
75.6%
102.2
75.4%
92.5%
10.3
93.6%
106.1
80.4%
100.8%
12.0
110.9%
103.6
76.6%
95.3%
Initial Score:
4
4
5
5
5
4.70
III. Assessing Debt and Contingent Liabilities
Debt Burden
Long-Term Debt/Capitalization
Contingent Liabilities/Long-Term Debt
Funded Status (DB Pension)
30%
25%
25%
25%
25%
2.5%
79.8%
82.1%
52.6%
2.4%
81.5%
83.7%
52.6%
2.4%
60.0%
82.4%
65.5%
2.4%
71.5%
82.8%
58.4%
Initial Score:
2
6
6
5
4.75
Initial Financial Profile Score
4.57
30
Preliminary S&P Rating Analysis:
Enterprise Profile
Sample Hospital
I. Industry Risk
20%
II. Economic Fundamentals
Primary Service Area Population
20%
100%
III. Market Position
Market Share
Medical Staff
Payer Mix
Clinical Quality and Information Technology
50%
50%
20%
15%
15%
IV. Management and Governance
10%
Initial Enterprise Profile Score
Value
N/A
Initial Score:
Score
3
3
1,200,000
Initial Score:
2
2
25%
N/A
N/A
N/A
Initial Score:
3
3
4
3
3
N/A
2
Initial Score:
2
2.78
31
Preliminary S&P Rating Analysis:
Indicative Rating
Enterprise Profile
Financial Profile
1
2
3
4
5
6
1
AAA
AA+
AA-
A-
BBB+/BBB
BB+/BB
2
AA+
AA/AA-
A+
A-
BBB/BBB-
BB/BB-
3
AA-
A+
A
BBB+/BBB
BBB-/B+
BB-
4
A
A/A-
A-/BBB+
BBB/BBB-
BB
B+
5
BBB+
BBB/BBB-
BBB-/B+
BB
BB-
B
6
BBB-
BB
BB-
B+
B
B-
Sample Hospital
32
Standard & Poor’s Stand-Alone Outlook
• S&P expects the trend in weaker operating margins to continue as
providers are facing mounting challenges, including weaker volume
trends, increased integration costs relating to physician employment, and
substantial investments in technology amid an evolving reimbursement
environment due to health care reform.
• S&P expects these trends will continue to pressure the sector over the
next several years especially given the difficulty of finding the next level of
expense cuts to offset the investments providers need to make to maintain
their financial stability.
• S&P believes the sector is at a tipping point where negative forces have
started to outweigh many providers‘ ability to implement sufficient
countermeasures.
33
S&P Rated Stand-Alone Hospitals in
Maryland
System
Rating
Outlook
Anne Arundel Health System
A-
Stable
Greater Baltimore Medical Center
A
Stable
LifeBridge Health, Inc.
A
Positive
Mercy Health Services
BBB
Negative
Meritus Health, Inc.
BBB-
Stable
Peninsula Regional Medical Center
A
Stable
Rating as of August 13, 2014
34
RATING AGENCY – MOODY’S
INVESTORS SERVICE
35
Moody’s Medians for 2012 ($ millions)
Moody's
Moody's
Moody's
Moody's
Moody's
Moody's
Moody's
Moody's
Moody's
"Aa2"
"Aa3"
"A1"
"A2"
"A3"
"Baa1"
"Baa2"
"Baa3"
"Below
Baa"
$2,329.7
$2,824.4
$1,379.9
$1,055.7
$746.6
$536.4
$464.7
$279.0
$391.9
$194.2
$446.4
$175.8
$252.0
$102.4
$206.7
$76.1
$202.5
$42.3
Profitability
Operating Margin
Operating EBIDA Margin
3.9%
10.8%
3.5%
10.4%
3.6%
10.9%
3.2%
10.2%
1.9%
10.0%
1.2%
7.8%
1.2%
8.8%
1.2%
7.9%
(1.8%)
4.7%
Debt Position
Debt Service Coverage
Debt to Capitalization
9.2
29.7%
7.0
31.8%
5.4
34.7%
5.6
37.3%
4.2
41.0%
3.5
47.4%
3.0
49.3%
3.5
47.6%
2.2
57.8%
Liquidity
Cash to Debt
222.2%
Days Cash on Hand (days) 289.9
177.4%
239.1
151.1%
218.8
139.5%
207.9
112.7%
175.9
92.0%
149.0
81.6%
139.5
86.4%
132.9
55.9%
80.1
125.6%
105.5%
Net Patient Revenue
Unrestricted Cash
Other
Capital Spending Ratio
132.9%
143.5%
123.8%
121.2%
113.6%
85.9%
95.8%
Medians based on and Moody’s Nonprofit Hospitals and Healthcare Systems for Fiscal Year 2012 (published in 2013).
36
2012 Moody’s Rating Distribution by
Revenue Size
100%
110
86
62
41
22
$2.0B- $4.0B
$4.0B+
75%
50%
25%
0%
$250M- $500M $500M- $1.0B $1.0B- $2.0B
Aa
A
Baa
Non-IG
Source: Information supplied by Moody’s Investors Service based upon 2008-2012 published ratios.
37
Moody’s Healthcare Scorecard - Overview
•
Moody’s updated their methodology in March 2012 and released a rating
methodology report explaining their approach to assigning ratings to not-for-profit
providers
– As part of the report, Moody’s included a scorecard that has a weighted quantitative grid
•
The report also included a set of qualitative factors that can impact the rating
– Subjective and weights vary from credit to credit
– As guidance, these factors can impact the rating by one notch but there is no exact
weight for each sub-factor
•
In addition to an updated rating methodology, Moody’s is currently tracking key
ratios and statistics not previously tracked
– Unique patients, Medicare readmission rates, Readmission rate, Total case mix index, #
of employed physicians, Worked RVUs for employed physicians, active medical staff
(independent & employed)
– Each indicator is meant to give insight as to the organizations ability to succeed in a new
value based/post reform healthcare environment
38
Moody’s Healthcare Scorecard –
Quantitative Factors
Sample Hospital – FYE 2013
Sub-Factor
Weights
Value
Score
Implied
Rating
25%
10%
784,135
3.0
5.43
9.51
A1
Baa3
5%
5%
44.1
21.9
7.28
10.75
A3
SG
Factor 2: Operating Performance (30%)
Operating Cash Flow Margin (%)
Debt to Cash Flow (x)
MADS Coverage (x)
10%
10%
10%
7.20
7.50
3.70
8.70
10.08
7.20
Baa2
Baa3
A3
Factor 3: Balance Sheet and Capital Plan (25%)
Days Cash on Hand (x)
Cash to Debt (%)
Monthly Liquidity to Demand Debt (%)
10%
10%
5%
99
75
0.94
8.85
9.02
20.90
Baa2
Baa2
SG
Factor 1: Market Position (45%)
Total Revenue ($000's)
Revenue Growth Rate (%) (3 yr CAGR)
Medicare and Medicaid payer mix (% of Gross Revenues)
Medicare
Medicaid
Weighted Score Legend
Aaa Aa1 Aa2
>
1.5
2.5
≤
1.5
2.5
3.5
Aa3
3.5
4.5
A1
4.5
5.5
A2
5.5
6.5
A3
6.5
7.5
Baa1 Baa2 Baa3
7.5
8.5
9.5
8.5
9.5
10.5
SG
10.5
Weighted Score:
8.64
Grid Rating
Baa2
39
Moody’s Healthcare Scorecard –
Qualitative Factors
• These factors can impact the rating by one notch each (up to three notches
total), but there is no exact weight for each sub-factor
Factors 4 & 5: Governance, M anagement, Debt Structure and
Other Debt Structure Specific Considerations
Positive,
Negative, or
Neutral
Analyst
Notching
(+/-)
Net Notching →
0.0
4) Governance and M anagement
a. Composition of Board and Senior Management
b. External Disclosures and Internal Controls
c. Integrated Short and Long-Range Planning
d. Ongoing Self-Assessment and Benchmark ing
e. Government and Stak eholder Relations
5) Debt Structure and Legal Security
a. Interest Rate, Counterparty, and Refinancing Risk
b. Borrowing Terms and Covenants
c. Legal Security and Other Bondholder Protections
Other Credit Specific Considerations
a. Multi-year Trend in Key Operating and Balance Sheet Factors
b. Ownership and Support by University or State/Local Government
c. Presence or Absence of CON
d. Mark et Share
e. Other Factors (ex: Comprehensive Debt)
40
RATING AGENCY – FITCH RATINGS
41
Fitch Medians for 2013 ($ millions)
Sample Size
Operating Revenue
Fitch
Fitch
Fitch
Fitch
Fitch
Fitch
Fitch
Fitch
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
14
$2,588.5
45
$1,484.1
31
$695.6
38
$545.7
30
$479.0
41
$431.0
18
$306.8
10
$341.6
Profitability
Operating Margin
Operating EBIDA Margin
6.0%
11.7%
3.9%
10.9%
3.7%
10.4%
2.0%
9.3%
2.2%
9.1%
0.7%
7.8%
1.0%
8.0%
2.5%
8.4%
Debt Position
Debt Service Coverage
Debt to Capitalization
5.5
26.9%
5.3
32.3%
4.5
35.1%
3.6
35.4%
3.2
42.2%
2.8
44.8%
2.3
49.7%
3.0
43.6%
Liquidity
Cash to Debt
Days Cash on Hand (days)
191.2%
287.2
167.4%
275.6
168.2%
237.3
138.5%
239.3
110.1%
178.1
158.4%
52.3%
125.8%
52.9%
112.2%
54.3%
126.1%
55.5%
Other
Capital Spending Ratio
Compensation Ratio
110.8%
54.4%
97.1%
145.9
103.1%
57.8%
91.7%
142.2
86.6%
56.8%
88.2%
128.1
88.6%
54.9%
Medians based on Fitch’s Ratios for Nonprofit Hospitals and Healthcare Systems for Fiscal Year 2013 (published in 2014).
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Fitch’s 2013 Median Ratios
• Fitch reported the 2013 results on August 11, 2014
• For the first time in the past 6 years, Fitch Ratings observed a
decline in operating profitability across all rating categories.
• Fitch attributes the primary causes driving the decline to be
ongoing softness in volumes coupled with the transition to
lower cost services, continued reimbursement pressure and
ongoing costs associated with the implementation of the
Patient Protection and Affordable Care Act (PPACA).
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Fitch’s 2013 Median Ratios (continued)
• Balance sheet liquidity metrics further strengthened with key measures
including days cash on hand (DCOH), cushion and cash to debt ratios
continuing year-over-year improvement. Fitch believes the balance sheet
improvements reflect strong investment returns, solid yet reduced
profitability levels, vigilant capital/expense management and aggressive
revenue cycle management.
• Overall Median Rating Is ‘A’: Since 2003, the median rating in Fitch’s
portfolio has migrated upward to ‘A’ from ‘A−’. Furthermore, there has
been a significant increase in the percentage of ‘AA−’ rated entities among
Fitch’s rated borrowers since 2003. Fitch believes this trend is likely to
continue as the sector further consolidates as industry pressures
prompt lower-rated credits to affiliate, align or merge with stronger
partners.
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Capital Expenditure Trends
170.0%
160.0%
150.0%
140.0%
S&P
Moody's
Fitch
130.0%
120.0%
110.0%
100.0%
2008
2009
2010
2011
2012
2013
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Days Cash on Hand Trends
200.0
190.0
180.0
170.0
160.0
150.0
140.0
130.0
120.0
110.0
100.0
S&P
Moody's
Fitch
2008
2009
2010
2011
2012
2013
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Fitch Midyear Outlook
• Year-to-date rating actions display credit stability within the
sector through the first-half of calendar year 2014.
• From January 2014–July 18, 2014, Fitch affirmed 100 ratings,
downgraded 12 and upgraded 10. Over the same period, there
were 31 outlook changes: 16 negative and 15 positive.
• Key drivers on negative rating actions or outlook changes
primarily reflect the negative impacts related to unexpected
inpatient volume declines and an inability to adjust
expenses quickly against weaker-than-anticipated revenue.
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Fitch Midyear Outlook (continued)
• Rating drivers on positive rating actions were more varied;
several were driven by realized benefits of strategic
affiliations, while others’ were a result of volume growth
and more efficient operations.
• While Fitch expects the majority of rating actions in 2014 to
be affirmations, downgrades are likely to outpace upgrades.
Fitch believes negative rating actions are likely to be more
prevalent among borrowers in the ‘BBB’ rating category and
below. Expense-control initiatives will likely garner
diminishing returns, and increased uncertainty and costs
associated with PPACA implementation will make the
operating environment increasingly challenging to manage.
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Fitch Year-To-Date Ratings
YTD Outlooks as of July
2014
YTD Rating Actions as of
July 2014
2%
1%
Affirmed
8%
10%
Stable
Positive
Negative
90%
9%
Upgrade
Downgrade
80%
Rating
Watch On
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Fitch Rated Hospitals in Maryland
System
Rating
Outlook
Affinity Health Alliance
A
Stable
Anne Arundel Health System
A-
Stable
Bon Secours Health Care System
A-
Stable
Calvert Memorial Hospital
A
Stable
Carroll Hospital Center
BBB+
Stable
Doctors Community Hospital
BB+
Stable
Frederick Memorial Hospital.
BBB+
Stable
Johns Hopkins Health System
AA-
Stable
MedStar Health
A
Stable
University of Maryland Medical System
A
Stable
Rating as of August 11, 2014
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Speaker Biography
Jane Benjamin, Vice President, Kaufman Hall & Associates, Inc.
Provides both strategic and financial planning assistance to hospitals and health systems
nationwide. Her experience includes strategic and financial planning, reimbursement, mergers and
acquisitions, demand and utilization forecasting, and financial modeling.
Prior to joining Kaufman Hall, Mrs. Benjamin worked for Ernst & Young in its Health Sciences
Advisory Services Group for 19 years and was an adjunct faculty member at Carnegie Mellon
University.
Mrs. Benjamin has an M.B.A. and an M.A. in Healthcare Administration from the University of
Iowa and is a CPA.
Contact information:
Jane Benjamin
Vice President
Kaufman, Hall & Associates, Inc.
5202 Old Orchard Rd., Suite N700
Skokie, Illinois 60077
724.327.5770
jbenjamin@kaufmanhall.com
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