FY 2023 Hospital Sector Report Summary

The report centered on FY 2023 financial operating performance, key liquidity metrics and utilization data. The report also included an update on mergers and acquisitions currently pending in the state as well as Moody’s credit outlook for the sector on a national basis.

CT Hospital Mergers and Acquisitions: In March 2024 Yale New Haven Health Services received final regulatory approval from OHS to move forward with their acquisition of Prospect Medical Holdings (Manchester Memorial, Rockville & Waterbury hospital), but negotiations continue and have not been finalized. In February 2024 Nuvance Health signed an affiliation agreement with Northwell Health (NY’s largest healthcare provider with 21 hospitals). The merger is still subject to a CON process, requiring state approval in CT & NY and must also be approved by the Federal Trade Commission.

Utilization: FY 2023 utilization trends within CHEFA’s portfolio yielded mostly favorable results, with increases in patient discharges (up 0.6%), observation discharges (up 19.9%), ambulatory surgeries (up 6.3%) and emergency room visits (up 2.4%) from FY 2022, but overall, continues to lag pre-pandemic levels within some areas.

Operating Performance: FY 2023 operating results were mostly unfavorable with six entities experiencing a negative operating margin, averaging -4.3%. The portfolio operating margin median for the sector declined for the second consecutive year, to -1.4% in FY 2023 and is at its lowest level over the past five years. The operating margin median calculated on the 24 hospitals individually, fared more favorably and was on par with Moody’s 2022 Median of -0.3%. The operating cash flow margin median also declined the past two years (from 7.6% to 3.8%). The range varied widely from -4.8% to 7.1% with all but two entities reporting a decrease from the prior year. The FY 2023 debt service coverage ratio median of 3.1 times increased from 2.2 times in FY 2022 but is at its second lowest level over the past five years.

Liquidity: The FY 2023 days cash on hand median of 142.9 days decreased slightly from the prior year and is significantly lower than its five-year high of 193.5 days in FY 2021. The range varied among the entities (from 26.2 days to 286.1 days) with only one entity surpassing Moody’s overall Median of 205.6 days. The cash-to-debt median declined steadily over the past four years, from 173.6% to 125.1% with seven of the eleven entities reporting a decline during this time. Only three entities cash-to-debt ratios compared favorably to Moody’s overall median of 177.1%, averaging 414.1% among them.

Capital Investment: Despite the increased cost of capital and inflation, total aggregate capital spending increased 37.4% from FY 2022 to FY 2023 and is at its highest level over the past five years (up 49.5% from FY 2019). A substantial disproportion in capital spending exists among the hospitals based on the size and financial strength of the entities. Average age of plant decreased from the prior year but remains high at 14.1 years compared to Moody’s overall median of 12.7 years.

Credit Outlook: Four of the eight remaining stand-alone hospitals and all four in-state and multi-state health systems in the portfolio maintain an underlying credit rating with one or more of the rating agencies. Moody’s outlook for the not-for-profit healthcare sector for 2024 (issued on Nov 7, 2023) was revised from the previous year from negative to stable citing an anticipated modest rebound in patient volumes, higher reimbursement rates and improvements in revenue-cycle management while expense growth decelerates, especially for labor costs. These factors indicate that a financial recovery will increasingly take hold in 2024, marked by an uptick in cash flow margins.

To learn more about CHEFA’s Hospital Sector report for FY 2023 and the performance of the 23 hospital facilities that make up our hospital portfolio, please contact Michael Morris, Managing Director at mmorris@chefa.com.