U.S. Not-For-Profit Health Care Children's Hospital Median Financial Ratios vs. 2015

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1 U.S. Not-For-Profit Health Care Children's Hospital Median Financial Ratios vs Primary Credit nalysts: Suzie R Desai, Chicago (1) ; suzie.desai@spglobal.com Cynthia S Keller, New York (1) ; cynthia.keller@spglobal.com Secondary Contact: Kenneth T Gacka, Centennial (1) ; kenneth.gacka@spglobal.com Research Contributors: Meghana Hattangady, CRISIL Global nalytical Center, an S&P Global Ratings affiliate, Mumbai Prashant Singh, CRISIL Global nalytical Center, an S&P Global Ratings affiliate, Mumbai Mansi Sachdev, CRISIL Global nalytical Center, an S&P Global Ratings affiliate, Mumbai Table Of Contents Ratio nalysis Related Research UGUST 24,

2 U.S. Not-For-Profit Health Care Children's Hospital Median Financial Ratios vs Children's hospitals continue to be generally rated higher on the rating spectrum than stand-alone hospitals and more in line with health care systems even though most are stand-alone providers (see chart 1). bout 80% of all children's hospitals rated by S&P Global Ratings are rated '+' or above, including one rated '+', which is currently the highest rating assigned to a U.S. not-for-profit acute health care provider. We raised two ratings into the '' category from the '' category over the last year, which had a slight impact on the '' category ratios. Children's hospitals have also been incredibly stable historically: 95% of them carried a stable outlook at June 30, 2017, and the remaining one had a positive outlook (see chart 2). S&P Global Ratings has outstanding ratings on 20 children's hospitals, of which 18 (90%) are included in the financial medians. Because of the small sample size we do not calculate financial medians on the individual rating level or for the 'BBB' category. While children's hospitals have fared well relative to our overall population of acute-care credits, there are certain risks that could, over the longer-term, impact children's hospitals' credit profile. For example, recent discussions at the federal level that could limit Medicaid growth via block grants or per capita formulas could overly affect children's hospitals given their higher exposure to the Medicaid payor mix relative to general acute-care hospitals. We note though, that children's hospitals tend to have strengths in governmental advocacy which could help to lessen any impact from changes to Medicaid or potential cuts to programs like disproportionate share. In addition, over time there may be risks for pediatric hospitals associated with the shift from volume to value particularly as the high acuity of children's hospitals typically translates into higher costs; however, many children's hospitals typically have strong competitive positions and are essential for the insurance networks, which helps offset these risks. In addition, many children's hospitals are focused on managing care of pediatric patients, where appropriate, at lower cost settings such as ambulatory sites and less-costly owned or partnered community hospitals. Despite a high Medicaid payer mix, children's hospitals have traditionally performed very well as they are often the sole provider of high-end tertiary and quaternary pediatric services in their respective markets, have generally favorable commercial payer contracts, and are typically excellent fundraisers. In markets where many hospitals have small pediatric departments, the local children's hospital remains the tertiary hub for pediatric services. In many cases the children's hospital physicians provide medical staff coverage to these local providers which further cement their role as referring hospitals. Ongoing investment in partnerships with general acute-care providers both in and outside the immediate service area and in the general ambulatory network further support many children's hospitals' solid and growing market positions. The financial ratios affirm these characteristics with children's hospital rating category medians generally stronger in both the '' and '' categories compared to all stand-alone acute-care hospitals, although there are a few exceptions (see table 1). Overall, children's hospitals had stronger medians in both rating categories relative to stand-alone hospitals as their larger size and scale is reflected through higher net patient revenues and unrestricted reserves, and stronger operating margins, cash flow ratios, and excess margins. Debt metrics are typically modest which results in comparatively lower debt as a percent of capitalization and better unrestricted reserves relative to debt than all UGUST 24,

3 stand-alone hospitals. We noted some deterioration in certain metrics in the '' category relative to stand-alone hospitals, including debt burden and coverage ratios, which are a result of additional debt issuances and the movement of two stronger credits out of the '' category into the '' category. We note that although absolute unrestricted reserves remained healthy, days' cash on hand for the '' category was also impacted by higher capital spending; however as an offset, the average age of plant is very young at under nine years. lthough children's hospitals generally exhibit stronger ratios than their general acute-care counterparts, they have not been entirely immune from the factors affecting the overall sector. s a result, there were some mixed trends in their ratios in 2016 relative to 2015 (see table 2). The '' category hospitals showed declines in operating and excess margins. Both '' and '' category hospitals showed declines in debt service coverage and overall cash flow as well as days' cash on hand and unrestricted reserves. lthough the underlying trends are consistent with the industry, we also believe part of the fluctuation is due to the small sample size and the movement of children's hospitals between rating categories last year. Ratio nalysis While we view ratio analysis as an important tool in our assessment of the credit quality of not-for-profit hospitals and health care systems, it is only one of several factors that we take into consideration. Our analysis of the enterprise profile is as important. However, median ratios offer a snapshot of the financial position of our rated hospitals and help in the comparison of credits across rating categories. In addition, we believe tracking median ratios over time allows for a clearer understanding of industrywide trends and provides a tool to better assess the sector's future credit quality. Because of the intertwining of mission and operations among all members of an organization, the financial statements we generally use for the medians and our analyses are the system wide results, which include results for obligated and nonobligated group members. UGUST 24,

4 Chart 1 Chart 2 Table 1 U.S. Not-For-Profit Children s Hospital Medians vs. Stand-lone Hospital Medians By Rating Category Children's hospitals Stand-alone hospitals Children's hospitals Stand-alone hospitals Sample size Statement of operations Net patient revenue (NPR; $000) 1,182, , , ,619 Salaries & benefits/npr (%) Maximum annual debt service coverage (x) Operating lease-adjusted coverage (x)* Debt burden (%) EBID ($000) 237, , ,347 53,137 Nonoperating revenue/total revenue (%) EBID margin (%) Operating EBID margin (%) Operating margin (%) Excess margin (%) Capital expenditures/depr. & amort. exp. (%) Balance sheet verage age of plant (years) Cushion ratio (x) Days' cash on hand Days in accounts receivable Cash flow/total liabilities (%) Unrestricted reserves ($000) 878, , , ,899 UGUST 24,

5 Table 1 U.S. Not-For-Profit Children s Hospital Medians vs. Stand-lone Hospital Medians By Rating Category (cont.) Children's hospitals Stand-alone hospitals Children's hospitals Stand-alone hospitals Unrestricted reserves/long-term debt (%) Unrestricted reserves/contingent liabilities (%)* Contingent liabilities/long-term debt (%)* Long-term debt/capitalization (%) DB pension funded status (%)* N/ 74.8 Pension-adjusted long-term debt/capitalization (%)* *These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities. N/--not applicable. Table 2 U.S. Not-For-Profit Children s Hospital Medians vs Fiscal year Sample size Statement of operations Net patient revenue (NPR; $000) 1,182,628 1,328, , ,902 Salaries & benefits/npr (%) Maximum annual debt service coverage (x) Operating lease-adjusted coverage (x)* Debt burden (%) EBID ($000) 237, , , ,687 Nonoperating revenue/total revenue (%) EBID margin (%) Operating EBID margin (%) Operating margin (%) Excess margin (%) Capital expenditures/depr. & amort. exp. (%) Balance sheet verage age of plant (years) Cushion ratio (x) Days' cash on hand Days in accounts receivable Cash flow/total liabilities (%) Unrestricted reserves ($000) 878,427 1,378, , ,559 Unrestricted reserves/long-term debt (%) Unrestricted reserves/contingent liabilities (%)* Contingent liabilities/long-term debt (%)* Long-term debt/capitalization (%) UGUST 24,

6 Table 2 U.S. Not-For-Profit Children s Hospital Medians vs (cont.) Fiscal year DB pension funded status (%)* N/ 86.4 Pension-adjusted long-term debt/capitalization (%)* *These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities. N/--not applicable. Related Research U.S. Not-For-Profit cute Health Care Ratios: Operating Performance Weakens While Balance Sheets re Stable, ug. 24, 2017 U.S. Not-For-Profit Health Care Stand-lone Hospital Median Financial Ratios 2016 vs. 2015, ug. 24, 2017 U.S. Not-For-Profit Health Care System Median Financial Ratios 2016 vs. 2015, ug. 24, 2017 U.S. Not-For-Profit Health Care Small Stand-lone Hospital Median Financial Ratios 2016 vs. 2015, ug. 24, 2017 U.S. Not-For-Profit cute Health Care Speculative Grade Median Financial Ratios 2016 vs. 2015, ug. 24, 2017 Glossary of our ratios Glossary: Not-For-Profit Health Care Ratios, Oct. 26, 2011 Monthly rating changes U.S. Not-For-Profit Health Care Rating ctions, December 2016, Jan. 18, 2017 U.S. Not-For-Profit Health Care Rating ctions, November 2016, Jan. 6, 2017 U.S. Not-For-Profit Health Care Rating ctions, October 2016, Nov. 18, 2016 U.S. Not-For-Profit Health Care Rating ctions, September 2016, Oct. 20, 2016 U.S. Not-For-Profit Health Care Rating ctions, ugust 2016, Sept. 15, 2016 U.S. Not-For-Profit Health Care Rating ctions, July 2016, ug. 29, 2016 U.S. Not-For-Profit Health Care Rating ctions, June 2016, July 15, 2016 U.S. Not-For-Profit Health Care Rating ctions, May 2016, June 17, 2016 U.S. Not-For-Profit Health Care Rating ctions, pril 2016, May 13, 2016 U.S. Not-For-Profit Health Care Rating ctions, March 2016, May 6, 2016 U.S. Not-For-Profit Health Care Rating ctions, February 2016, March 29, 2016 U.S. Not-For-Profit Health Care Rating ctions, January 2016, Feb. 12, 2016 For a list of outstanding acute-care stand-alone and health system ratings and outlooks please see: U.S. Not-For-Profit cute Health Care Outstanding Ratings nd Outlooks s Of June 30, 2017, ug. 24, 2017 Only a rating committee may determine a rating action and this report does not constitute a rating action. UGUST 24,

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