January 5, 2016 / 2:01 PM / 3 years ago

Fitch: U.S. Hospitals Face Challenges to Profitability in 2016

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Hospitals' Credit Diagnosis (Affordable Care Act (ACA) Growing Pains) here NEW YORK, January 05 (Fitch) A group of the largest U.S. for-profit hospital companies reported an average of 2% growth in organic patient volumes in third-quarter 2015 (3Q15). Companies demonstrated little pull-through of this volume growth to operating margins, which is a reversal from the last few quarters when margins were up strongly year over year. According to a new Fitch Ratings report, during 3Q15, the group's average operating EBITDA margin was up only 16 basis points versus 3Q14, and some companies reported a steep drop in same hospital margins. Higher labor and supplies expenses and relatively weaker growth in pricing played a role in these results. Although some of these headwinds to profitability appear to be transient, Fitch largely expects margins for this group of companies to remain under pressure in 2016. Some companies reported that a higher level of uncompensated care was a headwind to margins in the quarter. The benefits of the Affordable Care Act (ACA) for acute care hospitals ramped up in early 2015, and the short operating history under the legislation makes it difficult to tell how much of the uptick in uncompensated care is related to a tapering of its benefits. However, concerns regarding the commercial viability of the public health insurance exchanges, and stalled progress of expansion of state Medicaid programs indicate that the benefit may be slow to accelerate in the coming year. Presidential election-cycle politicking and ACA-related news flow will influence equity prices and capital deployment priorities for hospital companies throughout 2016. Leverage for some companies remains quite elevated from recent acquisitions. Good operating cash flow generation and proceeds from asset sales will provide an opportunity to pay down debt over the next several quarters. However, it appears more likely cash will be directed to acquisitions and share repurchases. Therefore, while most companies have some headroom under negative rating triggers, upward rating momentum in 2016 will likely be constrained by capital deployment decisions. The full report, 'Hospitals' Credit Diagnosis: Affordable Care Act Growing Pains' is available at www.fitchratings.com or by clicking on the link below. The report provides a summary of the quarterly operating performance and credit metrics of companies in the for-profit hospital sector, including detailed debt and organizational structure charts. Contact: Megan Neuburger, CFA Managing Director +1-212-908-0501 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com. Applicable Criteria Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 05 Aug 2013) here Related Research 2014 Outlook: U.S. Healthcare - Secular Challenges Require a Compelling Value Propositihere High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies here High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies here Margin Preservation Strategies - Different Angles (Credit Implications for U.S. Hospitals and Health Insurers) here The Affordable Care Act and Healthcare Providers (Assessing the Potential Impact) here U.S. Leveraged Finance Spotlight Series - HCA Holdings, Inc. here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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