CHICAGO - Revenue and demand pressure on not-for-profit healthcare providers as they navigate federal healthcare reform will weigh down the sector for another year, Standard & Poor's said.
The rating agency said it expects downgrades to outpace upgrades in 2015 as the sector grapples with operating margins pinched by rising costs.
The rating agency, which released its sector outlook report Wednesday, joined Fitch Ratings and Moody's Investors Service in taking a negative stance on the sector despite what it considers a glimmer of relief on some fronts.
"The negative pressures facing most providers are widespread," said healthcare analyst Martin Arrick. "While we believe that many hospitals and health systems are managing and will continue to manage this period of change and reform effectively, it is our opinion that many providers will not be able to adapt and will see ongoing operating margin and cash flow erosion lead to rating deterioration."
Arrick cites challenges that range from revenue and reimbursement pressures and the impact of health care reform readiness activities to soft demand, particularly for the financially important inpatient business, and a shift to value-based payments from fee-for-service payments.
Larger and higher-rated systems are not immune from those pressures even though smaller ones are particularly vulnerable "indicating that while the strong still retain many advantages over weaker credits, everyone is feeling the heat, regardless of size or rating," he said.
The sector's negatives outweigh the relief hospitals are seeing from the expansion of health care coverage under the Affordable Care Act, and though they have benefitted from robust investment returns and merger activity.
Federal healthcare reform also remains the subject of legal and political challenges.
Standard & Poor's highlights the potential impact of the King vs. Burwell case before the U.S. Supreme Court. A decision eliminating subsidies for millions of newly insured people could reinforce the negative outlook for the sector due to the direct impact of lost reimbursement and a resurgence in costs for treating uninsured patients, according to the report.
Mid-term elections giving Republicans greater power in Congress also will fuel efforts to repeal or chip away at the reforms.
The rating agency put a negative outlook on the sector last year and during 2014 downgrades exceeded upgrades, and the disparity would likely have been greater if not for the high level of merger activity, the report said.
Fitch on Dec. 9 said the sector outlook for non-profit healthcare was negative, but at the same time said the credit rating outlook is stable.
Fitch said its negative sector forecast, the same as last year, reflects the high level of uncertainty faced by healthcare management teams as they attempt to navigate the changing care delivery/reimbursement model and the political and legal uncertainties of further implementation of the ACA.
"As a result, Fitch expects a higher level of year-over-year performance volatility among its rated entities, compared with prior years," Fitch healthcare analysts James LeBuhn and Jennifer Kim wrote, adding that the improving liquidity and moderating leverage would provide a strong financial cushion to offset the increase.
Fitch's stable rating outlook for the sector, however, anticipates that "the vast majority of rating actions and outlooks in 2015 to be affirmations and stable, respectively. Through Dec. 8, Fitch had issued 147 ratings affirmations, 17 downgrades and 24 upgrades.
Moody's earlier this month said it would maintain its negative outlook on the sector, warning that key economic and financial conditions in the already challenged sector are expected to remain weak.
Operating margins, cash flow growth, and revenue growth are all expected to remain low in 2015, according to Moody's. The impact of the new federal health care law will vary by state as implementation continues to be uneven, analysts said.
