rating-agenciesFitch, Moody’s and Standard & Poor’s recently released their reports on 2014 not-for-profit hospital median financial ratios. As key metrics climb, providers who don’t keep up with their peer group are increasingly at risk of being downgraded.

According to rating agencies, most not-for-profit hospitals and health systems grew revenues and improved profitability and liquidity in 2014.

Agencies assign bond ratings based on the likelihood borrowers will pay back bondholders.

Rating analysts look at numerous qualitative and quantitative factors, including more than a dozen financial ratios.

Although there are other important ratios, a significant portion of the quantitative analysis focuses on four so-called key ratios:

  • Days cash on hand (DCOH)
  • Maximum annual debt service (MADS) coverage
  • Cash to debt
  • Debt to capitalization.

Collectively, these four ratios can explain close to half of a hospital’s overall bond rating.

Medians for each key ratio continued to improve in 2014, raising the bar for hospitals across the rating spectrum:

  • “AA” category: ratings from AA+/Aa1 to AA-/Aa3
  • “A” category: ratings from A+/A1 to A-/A3, and
  • “BBB” category: ratings from BBB+/Baa1 to BBB-/Baa3.

Days Cash On Hand

Days cash on hand measures a hospital’s ability to meet operating expenses from cash on hand.

Rating agencies don’t like to admit it, but DCOH is the most important of all financial ratios.

DCOH medians have improved steadily in the last several years, which Fitch attributes to a combination of improved cash flows, strong investment returns, lower capital spending and diligent revenue cycle initiatives.

S&P publishes standalone medians separate from health system medians, so their medians for each type of provider may not be comparable to the other two agencies.

Note: Fitch “BBB” medians exclude BBB-.

Cash to Debt

Cash to debt is the ratio of unrestricted cash and investments to long term debt and measures the ability to pay off debt with unrestricted reserves if the need ever arose, for example if variable rate debt were put back to the hospital (accelerated).

Cash to debt medians have also improved across the rating spectrum in recent years as providers hoarded cash while at the same time avoiding leverage.


Maximum Annual Debt Service Coverage

MADS coverage measures the hospital’s ability to meet its highest projected annual debt service from net income available for debt service (free cash flow).

Mostly flat in prior years, MADS coverage went up in 2014, particularly in the “A” and above rating categories.


According to Moody’s, this improvement is due to a combination of debt refunding savings, revenue growth, investment returns, and profitability improvements.

Debt to Capitalization

Debt to Capitalization measures leverage.

With more debt comes higher debt service payments and more risk that bondholders will not be repaid.

Leverage has declined in recent years.


S&P attributes the decline to lighter capital spending and debt issuance.

Impressive investment returns for those hospitals who invested in the stock market has also contributed to better measures.

Standalone vs. System Medians

An update on key ratios would not be complete without pointing out that medians can vary significantly between standalone providers and health systems.

Standalone providers do not benefit from geographical diversification and are held by rating agencies to higher standards than geographically-diversified health systems with similar ratings.

This is not apparent when reviewing Fitch and Moody medians, as the two agencies do not break out standalone providers from health systems, but it becomes clear when benchmarking against S&P, which does publish separate medians for standalone and systems.


The gap is more pronounced in the higher rating categories.

For example, systems rated in the “AA” category get away with almost 100 fewer days cash on hand than their standalone counterparts; in the “A” category, system days cash on hand are 80 lower days than for standalone providers.

In the “BBB” category, the difference is less material.


As most hospitals continue to improve their credit picture, chief financial officers need to be reminded that stronger ratios may not translate into stronger ratings if the hospital is just keeping up with their peer group.

In today’s rising median environment, hospitals that want to improve their bond ratings must show they are trending favorably when compared to their peer group.