Apply Pressure Here! Hospitals Face Converging Secular and Cyclical Trend

MarketsETF Trends

By SNW Asset Management via Iris.xyz

The not-for-profit (NFP) hospital sector credit ratings and fundamentals peaked in 2017. Over the last three years, hospitals saw accelerating revenue growth, reduced charity care and falling bad debt expense resulting from expanded health insurance access.

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These improvements led to stable, and in some cases improved, operating cash flow margins during a time of both regulatory implementation pain and robust political healthcare debate.

There are two secular trends in the hospital sector: NFP tax status and a booming +65-year-old population. NFP hospitals do not distribute profits, and therefore earnings accumulate into sizable cash and liquid investments, which boosts balance sheet strength.

For-profit hospitals, on the other hand, distribute earnings and generally have weaker liquidity ratios and less balance sheet strength, which potentially makes them more susceptible to market disruptions. The relative balance sheet strength of the NPF hospitals is a positive secular trend. The growth of the +65-year-old population between now and 2030, however, is a negative secular trend. An aging population is good for hospital demand, but 65 is also the eligibility age for the government Medicare insurance program.

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