The not-for-profit hospital sector has received another vote of confidence from a credit-rating agency.
Standard & Poor's has raised its outlook on the industry to stable from negative as operating margins and other financial metrics have improved.
The outlook upgrade comes about two weeks after Moody's Investors Service made a similar move. The agencies have reversed course after two consecutive years when all three of the major credit-rating agencies had a negative outlook on the sector.
Despite its pessimistic predictions for 2015, S&P saw the sector enjoy a better-than-expected boost from stronger patient volume trends, less uncompensated care, cost-cutting initiatives and merger and acquisition activity. The latter has been particularly important for providers seeking to hold down expenses, attract patients and physicians, and design new and more efficient care-delivery models.
Credit-rating upgrades have outpaced downgrades in the first six months of the year, S&P found. A total of 45 healthcare providers received an upgrade in the first half of 2015 compared to 32 that were downgraded. As usual, the majority of providers, 215, in S&P's universe received a rating affirmation.
The trends were strongest in states that expanded Medicaid eligibility to low-income adults. There were twice as many upgrades in expansion states, 30, compared to non-expansion states, 15. The opposite was also true: there were 13 downgrades in expansion states compared to 15 in non-expansion states. And because there are more rated providers in expansion states, 7.7% of credits got a downgrade in expansion states compared to 15.5% in non-expansion states.
S&P also found that stand-alone hospitals were more sensitive to the shifts in their operating environment than multihospital systems. While stand-alone hospitals represented three-quarters of upgrades, they also accounted for 84% of downgrades.
While the financial improvement is evident, some analysts have still cautioned that it could be short-lived. Fitch Ratings last week said it expects patient volume to increase at a slower pace in the second half of the year. In the second quarter, for instance, providers reported only a modest 0.8% increase in same-hospital admissions, or 2.8% when adjusted for outpatient activity.
“Due to a decreasing pace of coverage expansion, the magnitude of the tail wind to levels of uncompensated care and patient utilization of healthcare services is logically tapering,” Fitch analysts , which did not adjust the negative outlook on the sector.