S&P Global Ratings' not-for-profit acute health care portfolio rating and outlook actions continued to skew negatively in 2023 with more downgrades than upgrades and more unfavorable outlook revisions (stable to negative, positive to stable, or positive to negative) than favorable (stable to positive, negative to stable, or negative to positive), primarily reflecting challenging labor and inflationary environments. However, despite a higher-than-typical volume of actions in 2023, a vast majority of our ratings were unchanged throughout the year (79%; see chart 1), and most organizations carried stable outlooks (72%; see chart 2) as of Dec. 31, 2023. While these metrics point to reasonable credit stability, they have typically been higher in the past.

In 2022, the negative rating and outlook actions accelerated beginning mid-year. Actions in 2023 remained elevated but were somewhat more consistent throughout the year (see table 1). About half (28 of 57) of the downgrades occurred in the last third of the year (see chart 3) and while there were upgrades, eight of the 15 were related to mergers and acquisitions. Unfavorable outlook revisions outnumbered favorable outlook revisions, although the favorable revisions rose steadily throughout the year (see chart 4). At the end of 2023, almost one-third of our ratings carried a non-stable outlooks with the majority (24%) being negative and 5% positive.

Lists of stand-alone hospitals and health systems with rating and outlook changes, as well as a list of the nine new organizations rated by S&P Global Ratings in 2023, are at the end of this article.

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Table 1

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We have retained a negative outlook on the sector since 2022, recently affirming our position last December (see "U.S. Not-For-Profit Acute health Care Providers 2024 Outlook: Historical Peak Of Negative Outlooks Signals Ongoing Challenges" published Dec. 6, 2023, on RatingsDirect). This view is based in part on the increased number of negative outlooks and outlook revisions (see chart 5) as well as a multi-year trend of rising downgrades (see chart 6) outpacing upgrades in four of the past five years. Furthermore, most of the unfavorable outlook revisions were to negative from stable, indicating potential for further downgrades (see chart 7).

Although there is evidence of gradual improvement in the labor market and inflationary pressures, we believe the operating environment will remain constrained throughout 2023. A key area of focus related to maintaining credit rating stability continues to be understanding the magnitude and pace of performance recovery. This, coupled with an expected increase in strategic capital spending and debt issuance, could continue to further pressure certain credit ratings.

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The acute health care portfolio consists of stand-alone hospitals (58%) and health care systems (42%). Not surprisingly, most rating actions in 2023 took place in the speculative-grade and 'BBB' categories (41 of the 72 rating changes). Although the 'A' and 'BBB' categories had an equal number of rating changes, the range of revisions to 'BBB' category ratings were broader, from an upgrade to 'A' and a downgrade to 'BB-', while most of the 'A' category ratings remained within their category. Finally, there were limited changes in the 'AA' category as higher-rated issuers typically have more cushion to weather sector-wide events and less upside potential given that we do not rate any health care organizations 'AAA' based on their own credit characteristics.

While experiencing more than typical rating volatility, our rating distribution has remained generally stable. As in the past, the distribution is typically more favorable for health systems than for stand-alone providers (see chart 8), although neither sector has been immune to recent industry challenges. The most common rating for both health systems and stand-alone providers is 'A' (see chart 9), although health systems have many more 'AA' category ratings, while stand-alone providers have more 'BBB' and speculative-grade ratings.

Given the generally lower rating distribution for stand-alone providers, we would expect and have experienced more rating volatility for that group compared with health systems, though both had a similar percent of upgrades in 2023 (see charts 10 and 11). With benefits from size, scale, and diversity, health systems have slightly more stable portfolios, but this has narrowed as the current industry issues facing all providers proved taxing, with the traditional system benefits of size and scale not necessarily addressing the inflationary pressures any more successfully than stand-alone providers.

At the end of 2023, almost three-quarters of system ratings carried stable outlooks compared with 71% of stand-alone hospitals (see charts 12 and 13). There are more negative outlooks further down the rating scale, with almost half of the speculative-grade ratings carrying negative outlooks. Alternatively, with just two exceptions, the positive outlooks are concentrated in the 'BBB' and 'A' rating categories.

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We rate health care organizations in every state in the country (as well as the territory of Puerto Rico) with more than half of our ratings in the Midwest and Southeast (see map and chart 14).

The shapes of the rating distributions for the Northeast and West regions generally resemble a bell curve (see chart 15), and these regions, containing the states arguably hardest hit by labor issues, also carry the highest percentages of negative outlooks. The ratings are skewed toward the 'A' and 'AA' categories in the Southeast (74% of all ratings) and Midwest (78% of all ratings), with limited speculative-grade ratings. The Southwest region, with almost half of its ratings in the 'AA' category, is an outlier as it is the only region not dominated by 'A' category ratings. However, the region does have almost one-quarter of its ratings on negative outlook, which could dampen the rating profile in the future.

We believe many of the regional differences are fueled by characteristics at the individual state level that can materially affect credit ratings due to differences in demographic trends, payer mix, third-party reimbursement, and clinical practices.

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For a list of new ratings assigned in 2023, see table 2. For lists of upgrades, downgrades, favorable and unfavorable outlook revisions made during 2023, see tables 3, 4, 5, and 6.

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