U.S. Not-For-Profit Health Care Median Ratios

U.S. Not-For-Profit Health Care Median Ratios Brian T. Williamson Director, U.S. Public Finance S&P Global Ratings #AICPAhealth Speaker Biography Brian T. Williamson Director US Public Finance Healthcare Group Brian T. Williamson is a Director with S&P Global Ratings US Public Finance - Healthcare Group. Brian joined S&P Global in 2000 as an analyst specializing in Not for Profit Healthcare credits. As the senior healthcare analyst in the Chicago office, Brian analyzes hospitals and long-term care providers throughout the Midwest and Western states. Prior to joining S&P Global, Brian was a Senior Account Executive for FINOVA Capital Corporation in the Healthcare Group. Brian spent his entire career prior to joining S&P Global in the banking industry holding various commercial lending positions. Brian is a member of the Chicago Municipal Analysts Society and the National Federation of Municipal Analysts. Brian holds a Masters of Business Administration in Finance from The Ohio State University and a Bachelor s of Science in Accounting from Hampton University. \ #AICPAhealth 3-1

Introductions and Notes S&P Global not-for-profit health care team published its median analysis called U.S. Not-For-Profit Acute Health Care Ratios Are Calm On the Surface But Turbulent Underneath using a new format this year. To supplement that primary article, we also released more focused reports on the System, Stand-Alone, Speculative Grade, Small Hospital and Children s Hospital sectors, comparing 2015 medians to 2014 medians. \ #AICPAhealth Highlights of the 2015 Median Reports Operating performance improved across the board Net patient service revenues showed growth overall Most earnings, coverage, and debt burden ratios improved overall between 2015 and 2014. One exception is the ratio of non- operating revenue to total operating revenue which declined. Balance sheet ratios were largely stable between 2015 and 2014 with some very incremental growth across the board when all standalone providers and health systems are combined. While absolute unrestricted reserves increased in line with the rise in net patient service revenue, days' cash on hand and the ratio of unrestricted reserves to debt were generally stable #AICPAhealth 3-2

Highlights of the 2015 Median Reports (cont.) We believe that financial profiles will remain fairly stable through 2016, and into 2017 with upgrades approximately equal to downgrades. We expect operating margins will remain generally stable, although it is likely we are at a peak o Unrestricted reserve growth will largely depend on investment returns o Debt metrics are likely to increase slightly given the very heavy new issuance volume in 2016 o Consolidation is expected to continue, which has generally been a credit positive Stand-Alone & Health System Rating Distribution 30% 25% 20% 15% 10% 5% 0% AA+ AA AA- A+ A A- BBB+ BBB BBB- S.G. 3-3

2015 Medians Income Statement Highlights Revenue growth continues upward with stand-alone providers leading the charge 25 20 15 10 5 14.2 2.3 NPR Growth (%) 9.0 8.1 0 2015 2014 Operating Margin (%) Revenue gains in 2015 resulted in higher operating margins NPR Net patient revenue 4.0 2.0-3.4 3.4 3.6 2.7 2.4 & Health 2.9 2015 Medians Income Statement Highlights (continued) EBIDA Margin (%) EBIDA margins reflect continued growth; systems tend to be more aggressive investors and had lower non-operating returns Increase in operating margins offset by weaker non-operating results, produced only slight uptick in MADS coverage 12.4 12.2 12.0 11.8 11.6 11.4 11.2 11.0 6.0 4.0 2.0-12.2 12.2 12.0 12.0 12.0 & Health 2015 2014 4.3 4.1 4.0 3.8 & Health MADS Coverage (x) 11.5 5.0 4.6 3-4

2015 Medians Balance Sheet Highlights Unrestricted Reserves Growth (%) Mixed results regarding growth in unrestricted reserves, systems improved at a reduced pace from the prior year Subtle growth in days cash on hand for both systems and standalones 25.0 20.0 15.0 10.0 5.0-230 220 210 200 190 21.7 14.9 & Health 13.3 11.8 9.7 20.5 +1.5% 217 214 222 216 206 203 & Health 2015 2014 Days' Cash on Hand +2.8% 2015 Medians Balance Sheet Highlights (continued) Unrestricted Reserves/Long-Term Debt (%) Continued unrestricted reserve growth despite increased debt issuance 200.0 150.0 100.0 50.0 161.0 156.9 143.5 135.1 123.6 118.5 109.7 104.6 115.8 Steady improvement, although 2015 metrics reflects slight increase given heavy debt volume that began in 2 nd half 2015 0.0 60 40 20 0 & Health 2015 2014 2013 2012 2011 2010 2009 2008 2007 Debt to Capitalization (%) 32.1 31.8 33.6 36.4 37.0 38.1 39.0 39.0 36.1 & Health 3-5

2015 Medians Balance Sheet Highlights Cap Ex/Depreciation (%) (continued) 200 Still fairly conservative investments in capital across stand-alone and system providers 150 100 50 0 112.6 110.9 118.4 121.2 115.7 106.5 130.3 & Health 156.1 151.6 2015 2014 2013 2012 2011 2010 2009 2008 2007 Average Age of Plant (years) Average age of plant remained level 11 10.5 10 10.8 10.8 10.7 10.5 10.4 10.0 9.8 9.8 9.7 9.5 9 & Health Stand-Alone & Health System Rating Trends 140 120 Rating changes driven solely by Dec. 2014 implementation 100 80 60 40 Downgrades solely due to revised criteria* Upgrades solely due to revised criteria* Downgrades 20 Upgrades 0 2016** 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 3-6

Stand-Alone & Health System Outlook 90 Changes 80 70 60 50 40 Positive Negative 30 20 10 0 2016* 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2015 Medians: Bright Spots Continued stability of inpatient volumes in many markets and more rational inpatient vs. observation shift (at reduced levels) Medicaid expansion boosted volumes and earnings in expansion states this is beginning to moderate at this time as expected Management s cost reduction efforts are having an impact, are on-going, and are now a yearly initiative for many Industry consolidation is expected to continue, leading to further cost savings over time Balance sheet improvement due to healthy financial performance, and positive merger and acquisition activity Debt metrics remained steady or improved due to low interest rates and associated debt re-financings, as well as on-going revenue growth 3-7

2015 Medians: Challenges Still some difficulty obtaining next level cost reductions - Often results in M&A that is significant as markets continue to consolidate Some state challenges to continue funding Medicaid and supplemental funding for providers Commercial plans seeking value-based contracts; federal reimbursement increasingly based on performance and quality metrics Ongoing competition from hospital competitors and a growing number of nontraditional sources: privately owned treatment centers, CVS-like competitors, impact of disruptive technology Potential growth in capital spending after several years of comparatively modest spending We expect that preparation for population health (new IT platforms, MD investments, new payor products) will help usher in evidence based medicine, higher quality including more appropriate utilization but likely to lower operating margins and even unrestricted liquidity Ongoing Consolidation Traditional benefits of consolidation continue to include: Size/scale and negotiating clout with suppliers and private payers Increased revenue and geographic diversity Better suited to capture patient demand More non-traditional partnering: Insurance plan acquisitions Unique joint ventures Urgent care centers / Ambulatory surgery centers / Imaging centers Accountable care organizations (ACO) Ratings are shifting upward for some Smaller and lower-rated credits continue to benefit from consolidation 3-8

Summary of Health Care Sector Outlook for 2016 2017 We expect stability but at peak now Positives for the sector include: Improved financial performance in our 2015 median observations, as negative pressures ease and longer-term positive countermeasures are having the intended impact The positive impact of the ACA on providers via improvements in volume levels, payor mix, and reductions in uncompensated care, although this remains state-, market- and provider-specific and is largely one-time in nature Balance sheet strength of many hospitals provides ongoing flexibility Negatives for the sector include: Positive impact of the ACA likely peaked, and we expect a return of revenue pressures, given the conservative forecasting of many providers and uncertainty about continued volume growth Re-establishment of the existing credit gap most specifically between large providers with strong system qualities as compared to smaller providers unable to leverage size and scale Uncertainty on multiple fronts, including pace of change to value models, potential investment return volatility, and pending election changes on state and federal health care policy Q&A 3-9

Please visit: www.spratings.com/nfphealthcare Brian T. Williamson Director, U.S. Public Finance T: 312.233.7009 brian.wiilliamson@spglobal.com 3-10

Thank You Copyright 2013 American Institute of CPAs. All rights reserved. #AICPAhealth 3-11