Fitch Ratings upgrades not-for-profit hospital outlook to stable as facilities meet challenge of COVID-19

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Fitch Ratings upgraded its outlook for not-for-profit hospitals from negative to stable going into 2021 as hospitals get a better handle on treating COVID-19.

The ratings agency emphasized in a 2021 outlook report Wednesday that hospitals are still going to have a difficult 2021 as profit margins are likely to continue to be down. Hospital systems faced a financial crisis caused by the cancellation of elective procedures at the onset of the pandemic in March.

But Fitch doesn’t predict that another nationwide shutdown of procedures is likely at this time, even as some systems have temporarily paused procedures with new surges of the virus.

“Elective procedures, even at a reduced clip, should not hit hospitals as hard financially as the nationwide shutdown that cut top line revenues by around 40% in Spring of 2020,” said Kevin Holloran, a senior director with Fitch, in a statement.

The reason is that hospitals have a better handle on treating COVID-19 infections and can shorten hospital stays, he said. But do not expect a major turnaround for hospitals, especially in the first half of 2021 as vaccines continue to be distributed. Hospitals will still have to pay extra for supplies and staff as they must continue to fight the virus.

“Providers will need to secure a mini-stockpile of ventilators, masks, gowns, drugs and certain types of beds, though adequate staffing will be the most critical component,” Holloran said.

Some of the higher costs for staff come from hiring temporary workers, premium pay and supplemental benefits.

Fitch also said hospitals are likely to hold more debt on their books. “As the pandemic began to affect revenues, many providers exercised their ability to secure additional liquidity in the form of drawn commercial paper, establishing and/or drawing down lines of credit, or even issuing taxable debt for general purposes,” the ratings agency’s outlook report said.

The agency added that a “significant amount” of this short-term debt will remain on hospitals’ balance sheets.

Some potential headwinds for the hospital sector include a worsening payer mix with fewer patients with commercial insurance and a larger amount of self-pay or Medicaid patients, which have a smaller reimbursement rate than commercial plans.

The change to this payer mix could depend on the economy of a certain area. “We would be especially concerned if the service area had been highly reliant on tourism or transportation, or oil production in some cases,” Fitch’s report said.

Smaller providers that cannot blunt the financial impact of the pandemic could also align with larger providers after the pandemic starts to subside, leading to a higher degree of deal activity in the latter half of the year.

“Fitch believes these factors may ultimately lead to additional merger and integration activity once the immediate crisis has passed,” the report said.