Healthcare Providers Are Essential. Do Capital Markets Agree?
This is part 1 of a 3-part series on U.S. hospitals, capital markets, and the credit impact of the coronavirus.
The COVID-19 pandemic lifted healthcare providers, including hospitals, nursing homes, and their front-line caregivers to a new and elevated status in the public consciousness. During the dark early days of the pandemic, images of tireless, dedicated, heroic healthcare workers selflessly caring for the gravely ill at great personal risk gave Americans hope at a time that was for many, the scariest of our lifetime. U.S. consumers appreciate and trust hospitals and healthcare workers, but prior to the pandemic, we pretty much took them for granted. All that changed in 2020. Grateful citizens brought food to overworked caregivers, donated protective equipment, banged pots outside their windows, and erected lawn signs reading “Thank you doctors and nurses” and “We love our Frontline Heroes”. Hospitals and nursing homes touted the heroism of their staff with slogans like “Home of the Brave” and “Heroes Work Here”.
The federal government also showered love on the healthcare sector, with significant, broadly distributed operating and liquidity support to relieve the stress placed on the healthcare sector from the pandemic and ensure that Americans sick with COVID would have access to care. Examples of federal support for healthcare include two programs that each offered more than $100 billion for healthcare providers — the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s Provider Relief Fund and Medicare’s Accelerated and Advanced Payments program. These were in addition to smaller or less direct support programs including the American Rescue Plan Act, which supports rural healthcare, vaccines and testing, and expands access to healthcare insurance coverage under the Affordable Care Act. The federal government also took other actions helpful to hospitals including reducing regulatory barriers to adoption of telemedicine.
High Essentiality and External Support
New public appreciation for the essentiality of healthcare providers, bolstered by fiscal support from the federal government, support the conclusion that hospitals play a critical role in fighting public health crises such as COVID-19, and highlight the need to maintain hospital capacity in the face of demand surges from public health crises. In the language of credit analysts, the healthcare sector now has very high essentiality and strong likelihood of external support, two factors which generally lead to stronger credit ratings and lower cost of capital.
Do the Capital Markets Care?
But are hospitals feeling the love from investors, lenders, and rating agencies? If the capital market agrees with the premise that essentiality is very high and external support in a crisis is likely, we should see credit ratings rise and cost of capital fall. Is that what’s happening? As with most things, the answer is “it’s complicated”.
Cost of capital is lower, but not because investors have more confidence in the healthcare sector. The lower cost of capital for U.S. healthcare organizations is largely due to the same reasons that other municipal sectors are enjoying. After an initial spike of uncertainty in spring 2020 which drove up yields and credit spreads, several factors caused a much-improved capital access environment for issuers. These factors included large amounts of liquidity injected into U.S. households from stimulus support and Federal Reserve actions including keeping interest rates close to zero and the confidence-boosting Municipal Liquidity Facility. These trends caused steady inflows into municipal bond funds and ETFs, lower yields, and tight credit spreads across the municipal market. The Fed’s recent talk of tapering its easy money policy caused the municipal market to pull back this fall, but overall, capital access has been excellent since the middle of 2020.
These powerful municipal market supply and demand dynamics overcame credit stress in the healthcare sector. In 2020, the three largest credit rating agencies — S&P Global Ratings, Moody’s Investors Service, and Fitch Ratings — downgraded ratings on 78 U.S. nonprofit hospitals and upgraded just 14, for a ratio of 5.6 to 1 (Nonprofit hospitals, which include government-owned facilities, comprise 76% of U.S. acute care hospitals). Ratings likely would have been substantially worse without federal government support, and many hospitals are struggling to survive even with support. Moody’s reported that on average, 43% of rated hospitals’ operating cash flow came from CARES Act grants in 2020, and still, 37% reported negative operating margins.
While rating agencies noted that generous stimulus funding mitigated negative credit pressure in the near term, none saw sufficient evidence that federal policy toward hospital essentiality had fundamentally shifted. Rather, rating agencies consider stimulus funding to be one-time in nature, spilling over into 2021 and perhaps 2022, but not fundamentally changing the federal policy framework. Furthermore, they see high government spending during the pandemic as creating the conditions for cutbacks in healthcare spending down the road. In other words, credit analysts continue to evaluate hospitals on their own strengths and weaknesses. The healthcare sector as a whole may be essential, but the policy framework by and large doesn’t guarantee that any particular hospital will survive. In fact, hospital closures and bankruptcies continued in 2020 for many of the same reasons as in the past.
Will the Party Last?
While hospitals are enjoying nearly unprecedented low cost of capital, that’s largely due to macroeconomic factors and supply and demand characteristics currently prevailing in the municipal market. The healthcare sector has proven resilient in the past and has high levels of liquidity, but also faces numerous pre-existing stresses accelerated by COVID, new forms of competition, changing consumer dynamics, and looming federal fiscal stress. We’ll explore these topics in parts 2 and 3 of the series.
In Part 2 of our 3-part series — Do U.S. Hospitals Have a Case of Long-Haul COVID? we’ll discuss why many hospitals are losing money despite being full to the brim, why credit ratings are under stress, and how hospitals have adapted operations as the pandemic progressed.
In Part 3 — U.S. Hospitals Emerging into A Changed World, we’ll look at how the pandemic is accelerating certain pre-pandemic industry trends, the changing nature of competition, and what consumers want from healthcare providers now more than ever.
Liz Sweeney is Senior Consultant, U.S. Public Finance at SwissThink, which offers learning solutions and consulting for credit markets. She is also a board member of University of Maryland Medical System and a debt advisor to nonprofits and municipalities.
 S&P Global Ratings, “U.S. Not-for-Profit Health Care Rating Actions, 2020 Year-End Review”, Feb. 25, 2021, Fitch Ratings, “2021 Median Ratios: Not-for-Profit Hospitals and Healthcare Systems” (fiscal 2020 median ratios), Aug. 3, 2021; Moody’s Investors Service