CHICAGO - Capital spending by non-profit hospitals fell to its lowest point in six years in 2014 as hospitals continue to pull back from building new, costly inpatient facilities, according to Fitch Ratings.
Hospitals across all ratings categories restrained their capital spending last year, bringing the median down to the lowest since 2008.
"That's below even the median level we saw in 2010, when hospitals were really pulling back on capital spending," Fitch analyst Jim LeBuhn said.
"We expect capital spending to rise modestly going forward," he said. "We would not be surprised to see capital spending move up over the next year or two but not to the levels we saw five or six years ago."
LeBuhn made the comments Aug. 13 during a conference call the ratings firm held on its new report outlining the non-profit hospital sector's 2015 medians.
"The reduction in capital spending was a surprise to us, not so much that it moderated but the level of moderation year over year," he said. "As we talk with organizations and providers out there, a lot of the big inpatient projects [are on hold] and the capital spending is more on the IT side and more recently, much more investing in outpatient facilities for a greater presence in the community, which is a much lower cost." Median capital expenditures as a percentage of depreciation expense dropped to 17.6% in fiscal 2014 from 149.5% in fiscal 2013 for AA-rated borrowers, according to the report.
"The decline was more moderate for A and BBB-rated issuers . But 2014 was the first year BBB issuer spending fell significantly below 100%," the report said. As a result, average age of plant declined in the AA category and slightly increased for A and BBB borrowers.
The capital spending measure was one of a handful of surprises for analysts, LeBuhn said. Fitch put a negative outlook on the sector in December 2014 largely due to uncertainties facing hospitals from the new federal health care law and a decline in volumes, among other things.
But hospitals enjoyed strong improvements in many key areas in fiscal 2014 as uncertainties surrounding the Affordable Care Act settled down. The sector saw improvements in operating results, stronger clinical volumes and management teams have done a "better than expected" job of improving operating efficiencies, according to Fitch.
Key median liquidity metrics improved as well. Days-cash-on-hand, for example, increased to 203.4 days from 193.9 days in 2013.
Clinical volumes saw an increase in fiscal 2014 due largely to the increase in insurance coverage from the Affordable Care Act. The median improvements are reflected in ratings actions over the past year, where Fitch upgraded 37 ratings, downgraded 11, and affirmed 201.
"Contrary to Fitch's expectation for 2014, upgrades significantly outpaced downgrades (on a 3:1 scale), driven by strong financial results across the rating spectrum, aided by improved payer mix and utilization from Patient Protection and Affordable Care Act," Fitch said.
The ratings agency said it expects the positive trend to continue through 2015 as the payer mix continues to appear to improve and management teams continue to make operational improvements.
Higher-rated, larger systems enjoyed more of a volume boost than the stand-alone providers, according to Fitch. The so-called credit gap between larger, higher-rated hospitals and smaller, lower-rated providers widened in 2014, as it has over the last several years, and is expected to continue to widen in 2015, Fitch said.
"Diverging operating profitability levels were particularly notable, with higher-rated borrowers posting solid improvements across all key financial metrics, whereas lower-rated borrowers mostly continued to trend downward," Fitch said in the report.
While median operating profitability measures showed strong gains in 2014 in the A and AA categories, the same measures for BBB-rated issuers declined in 2014 compared to 2013. That trend is expected to continue in 2015, as new industry trends continue to favor larger systems, Fitch said. Consolidation is also expected to continue over the next few years,
