U.S. Not-For-Profit Health Care Children's Hospital Median Financial Ratios Primary Credit Analysts: Suzie R Desai, Chicago (1) 312-233-7046; suzie.desai@spglobal.com Cynthia S Keller, New York (1) 212-438-2035; cynthia.keller@spglobal.com Secondary Contacts: J. Kevin K Holloran, Dallas (1) 214-871-1412; kevin.holloran@spglobal.com Martin D Arrick, San Francisco (1) 415-371-5078; martin.arrick@spglobal.com Patrick Zagar, Dallas (1) 214-765-5883; patrick.zagar@spglobal.com Research Contributor: Meghana Hattangady, CRISIL Global Analytical Center, an S&P affiliate, Mumbai Table Of Contents Ratio Analysis Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 21, 2016 1
U.S. Not-For-Profit Health Care Children's Hospital Median Financial Ratios Children's hospital ratios are 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). About 80% of all children's hospitals rated by S&P Global Ratings are rated at 'A+' or above, including one which is rated at 'AA+', which is currently the highest rating assigned to a U.S. not-for-profit acute health care provider. The children's hospitals also have the most favorable outlook distribution, with 85% of all rated children's hospitals carrying a stable outlook and the remaining carrying 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. 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 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. 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, these hospitals typically have strong competitive positions and are essential for the insurance networks which helps offset these risks. In addition, many pediatric hospitals are working with state Medicaid programs, including entering into capitated contracts, which aim to lower cost of care and improve quality. These efforts can also be translated to other contracts, especially as the larger commercial contracts move to transfer risk and toward value based reimbursement. The financial ratios affirm these characteristics with children's hospital rating category medians stronger in virtually every metric compared to our entire rated universe (see table 1). This includes stronger debt service coverage, larger size and scale, and higher nonoperating revenue which is generated from more robust unrestricted reserves and often strong fund raising. 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 hospitals. Ratio Analysis 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 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 21, 2016 2
U.S. Not-For-Profit Health Care Children's Hospital Median Financial Ratios we generally use for the medians and our analyses are the systemwide results, which include results for obligated and nonobligated group members. Chart 1 Chart 2 Table 1 U.S. Not-For-Profit Children s Hospital Medians vs. Stand-Alone Hospital Medians By Rating Category 2015 AA Children's hospitals All hospitals Children's hospitals All hospitals Sample size 10 33 8 137 Statement of operations Net patient revenue (NPR; $000) 1,328,504 878,082 687,902 429,850 Salaries & benefits/npr (%) 58.4 56.0 57.1 54.5 Maximum annual debt service coverage (x) 6.9 6.7 5.7 4.5 Operating lease-adjusted coverage (x)* 5.4 5.3 4.1 3.8 Debt burden (%) 2.3 2.2 2.6 2.8 EBIDA ($000) 328,022 147,085 121,687 58,576 Nonoperating revenue/total revenue (%) 3.0 2.9 2.8 2.0 EBIDA margin (%) 15.9 15.7 15.7 13.1 Operating EBIDA margin (%) 13.8 12.4 13.6 10.8 Operating margin (%) 8.2 5.8 4.9 3.6 Excess margin (%) 10.2 9.4 8.1 5.8 Capital expenditures/depr. & amort. exp. (%) Balance sheet 160.1 132.5 67.2 110.8 Average age of plant (years) 8.5 10.6 8.4 10.6 Cushion ratio (x) 41.7 38.2 24.8 22.4 Days' cash on hand 396.3 384.2 265.7 248.6 Days in accounts receivable 44.4 48.5 47.3 49.3 Cash flow/total liabilities (%) 26.7 24.6 24.8 19.6 A WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 21, 2016 3
U.S. Not-For-Profit Health Care Children's Hospital Median Financial Ratios Table 1 U.S. Not-For-Profit Children s Hospital Medians vs. Stand-Alone Hospital Medians By Rating Category 2015 (cont.) AA A Children's hospitals All hospitals Children's hospitals All hospitals Unrestricted reserves ($000) 1,378,393 791,883 525,559 282,197 Unrestricted reserves/long-term debt (%) 377.1 283.5 199.7 189.9 Unrestricted reserves/contingent liabilities (%)* 672.1 527.4 416.3 485.7 Contingent liabilities/long-term debt (%)* 34.4 40.3 45.6 35.7 Long-term debt/capitalization (%) 19.9 21.9 22.9 29.1 DB pension funded status (%)* 83.3 78.8 86.4 79.1 Pension-adjusted long-term debt/capitalization (%)* 21.7 23.5 23.9 30.8 *These five ratios are only for organizations that have defined-benefit (DB) pension plans, operating leases, or contingent liabilities. Related Research U.S. Not-For-Profit Health Care Stand-Alone Hospital Median Financial Ratios -- 2015 vs. 2014, Sept. 21, 2016 U.S. Not-For-Profit Health Care System Median Financial Ratios -- 2015 vs. 2014, Sept. 21, 2016 U.S. Not-For-Profit Health Care Small Stand-Alone Hospital Median Financial Ratios -- 2015, Sept. 21, 2016 U.S. Not-For-Profit Acute Health Care Speculative Grade Median Financial Ratios -- 2015, Sept. 21, 2016 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 Actions, December 2015, Jan. 27, 2016 U.S. Not-For-Profit Health Care Rating Actions, November 2015, Dec. 15, 2015 U.S. Not-For-Profit Health Care Rating Actions, October 2015, Nov. 16, 2015 U.S. Not-For-Profit Health Care Rating Actions, September 2015, Oct. 21, 2015 U.S. Not-For-Profit Health Care Rating Actions, August 2015, Sept. 23, 2015 U.S. Not-For-Profit Health Care Rating Actions, July 2015, Aug. 19, 2015 U.S. Not-For-Profit Health Care Rating Actions, June 2015, July 15, 2016 U.S. Not-For-Profit Health Care Rating Actions, May 2015, June 25, 2015 U.S. Not-For-Profit Health Care Rating Actions, April 2015, May 20, 2015 U.S. Not-For-Profit Health Care Rating Actions, March 2015, April 17, 2015 U.S. Not-For-Profit Health Care Rating Actions, February 2015, March 31, 2015 U.S. Not-For-Profit Health Care Rating Actions, January 2015, Feb. 25, 2015 For a list of outstanding acute care stand-alone and health system ratings and outlooks please see: U.S. Not-For-Profit Acute Health Care Outstanding Ratings And Outlooks As Of June 30, 2016, Sept. 21, 2016 Only a rating committee may determine a rating action and this report does not constitute a rating action. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 21, 2016 4
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