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Marcus and Vic welcome Kevin Holloran, Senior Director and head of the US Public Finance Healthcare Team at Fitch Ratings, to break down how credit ratings work in healthcare, why balance sheet strength outweighs short-term operating swings, and how margins shifted from steady pre-COVID levels through pandemic collapse, the 2021 rebound, and the post-2022 labor and inflation crunch. They cover Fitch’s focus on hospitals and life plan communities, the sector’s “trifurcation” between winners, r...
Marcus and Vic welcome Kevin Holloran, Senior Director and head of the US Public Finance Healthcare Team at Fitch Ratings, to break down how credit ratings work in healthcare, why balance sheet strength outweighs short-term operating swings, and how margins shifted from steady pre-COVID levels through pandemic collapse, the 2021 rebound, and the post-2022 labor and inflation crunch. They cover Fitch’s focus on hospitals and life plan communities, the sector’s “trifurcation” between winners, rural strugglers, and those stuck in the middle, and the impact of July’s policy shifts—including Medicaid pressures, site-neutral payments, supplemental payment changes, tariffs, and 340B tensions. Kevin also outlines system strategy around scale and outpatient migration, risks for life plan residents, and why the sector’s near-term stability masks growing uncertainty for 2025–26.
Every week, healthcare VCs and Jumpstart Health Investors co-founders Vic Gatto and Marcus Whitney review and unpack the happenings in US Healthcare, finance, technology and policy. With a firm belief that our healthcare system is doomed without entrepreneurship, they work through the mud to find the jewels, highlight headwinds and tailwinds, and bring on the smartest guests to fill in the gaps.
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Thank you.
All right, uh, back with another guest episode of Health Further and, uh, it's Vic and I here today.
Vic does a lot of these guest episodes without me, but this time.
Uh, I'm actually, uh, responsible for booking this show.
So, uh, I've got my friend and fellow board member at HFMA, Kevin Holleran.
Kevin is a senior director at Fitch, uh, which is one of the big agencies that, uh, does credit ratings, um, and analysis of many industries.
Kevin is, uh, the leader overall things not-for-profit provider.
Um, and so, you know, Kevin and I just sort of talk about this stuff whenever we're board meetings.
And he's, uh, you know, we've referenced him on the show when we, over time, as we've talked about how things are going in the not-for-profit sector.
When we check those news stories, Kevin is quoted in those.
And so it's great to have him on the show at this, at the, really the beginning of a very important, uh, phase change, I think, in the entire healthcare industry, given what happened, uh, you know, in July.
Uh, in DC So, you know, with that, Kevin, welcome to the show and thanks so much for making time for us.
Thanks for having me.
Looking forward to the discussion today and, uh, everything within reason we can cover.
No worries.
Oh, fantastic.
Fantastic.
So may, maybe just to start, um, can you frame up what, what Fitch does and what your job is and, and kind of how it works?
Like how Absolutely.
How the, how the business of, uh, applying credit ratings works.
Absolutely.
So there are three, and if you want to count Kroll, which is a relatively new entrant into the field, four major rating agencies.
I've sort of had the pleasure and privilege of working for two of the three.
And I sometimes like to say, you know, when I retire, I on a one day contract at Moody's, and then I'll collect all three of 'em and then, then I'll kind of move on with my life.
The role that we play is that we are, uh, an outside agency, outside firm.
Uh, we can't buy or sell bonds, um, strictly prohibited from that.
And we try to, and the exact quote you're gonna hear from a bond rating analyst is to ascertain an organization, in this case, healthcare organizations, their ability to repay debt on time and in full.
That's sort of the thing that we do.
And there's a, a scale that goes out there.
A lot of people are familiar with AAA and a lot of people are unfortunately fair with D for default.
And there's sort of everything in the middle and we add letters and pluses and minuses to the whole thing.
What that does and what that that functions for is again, an independent third analysis for the buy side, the the holder side, the investor side to figure out how risky is this investment and basically.
It goes a long way to determining pricing, although we're not involved in that.
But certainly if all three rating agencies come down and says, this is distressed, credit investors are gonna want a higher yield, and vice versa.
If it's a very safe credit, they put that in their portfolio, sit on it and count it and take it to the bank, kind of a thing.
So that's our role and that's our organization.
We rate about 260 hospitals, uh, in, in the us.
That's not necessarily.
Bills themselves.
There are systems in there.
Mm-hmm.
So I usually say about 20% of the hospitals are out there as a fairly accurate count that's out there.
And then Fitch itself has got a very strong presence in long-term care, uh, often called CRCs.
Uh, we call 'em life plan communities.
We rate about 160 of those.
So you put us together, we're actually a fairly sizable entity.
Um, and we, we travel coast to coast.
Uh, don't do any international ratings just yet, but, uh, wherever there's a rating, anyone needs me, that's where we head out and we travel.
We make it make time for.
1, 1, 1 qualifying question.
You know, when you said, uh, you cover about 20%, uh, why is it 20%?
Like what, what sort of sets, uh, the spectrum of, of hospitals out there that you, you rate and, and why would a hospital not be rated by fich?
Sure.
Um, two reasons.
So I say that's just, you know, because I'm in the not-for-profit world, so us not-for-profit, we at Fitch.
And the other rating agencies, again, I've worked for another one.
Yes.
They rate for profits, just not my particular group.
And so that's a, that's a big bucket that's out there, quite frankly.
And you rate, you know, one big system and it could have several hundred hospitals in there, as you well know.
Right.
The second one is, you know, rating agencies and, and analysts we deal with, generally speaking, kind of that cream of the crop.
Name brand organizations, particularly in the not-for-profit world.
Everyone knows the names, everyone's heard from 'em.
They've got good balance sheets, great management teams, you know, wherewithal, essentiality, all the things that we're looking for in our rating process.
And they come get ratings because it helps them, you know, issue debt, uh, cheaper.
They take advantage of their tax exempt status.
Quite frankly, if you don't have those things, uh, I'm very small, I'm very rural.
I don't have a good balance sheet, and I'm, I'm not making anything on my book of business.
I can rate you, you're just not gonna like the rating.
You know, it's gonna be deeply speculative grade, which means you really could probably get a loan locally from a bank, maybe someone on your board.
That's where you're most likely gonna go for just to, you know, throw out a number here.
Uh, 96%, I think, uh, last time I counted of our book of business, our portfolio is investment grade.
So just, you know, you know, four, 5% or so is, is speculative grade to the best of my knowledge and my entire career.
Only two credits ever started out in speculative grade.
The rest work their way down into it, just to give you an idea.
So it's an exceptionally rare thing for someone that says, look, I know I'm non-investment grade, I'm, I'm, you know, we high yield bonds, junk bonds, whatever phrase you like.
Um.
I'm gonna issue bonds anyway.
Uh, we just don't see that.
They just don't come to us.
Yeah.
Got it.
Got it.
Okay.
That, that was super helpful.
Um, okay, so I'm gonna, I would love for you to speak for a while uninterrupted and then I think Vic and I will both have some questions for you.
So, okay.
What I would love for you to frame up, uh, is give us a general sense of where things were pre COVID, what happened post COVID.
Then what has happened since Trump came into office and really sort of July 3rd, if, if we could sort of look at it as three buckets, is that, is that a decent way to sort of carve it up?
This was very fair and uh, when we do a lot of presentations, that's sort of how we, we talk about it.
So the good old days, the good old days before COVID, uh, most of, again, the, the rated universe, which is not healthcare writ large, but it's at the cream of the crops or the haves, and I hate to say the haves and the have nots.
But, but there you go.
Um, we're making 2.5 to 3%, uh, operating margins, cash flowing very comfortably.
And, and that number, we usually wanna say 3%.
Operating margin is sort of the key or the, the, the target is, everything above that is gravy.
But at 3%, you know, I can basically sock away some money into my war chest.
I can pay for my capital, I can certainly pay my people my, my my bills, expenses and things like that.
And don't forget the bond holders.
And so anything above 3% is actually.
Is is wonderful.
It's great.
I can build that balance sheet even larger.
I can take on more capital projects if I need to.
Maybe I need to, um, uh, make sure that I pay people well enough that I keep them and don't lose them to a competitor that's out there.
But that's sort of been the, the toggle mark that a lot of people will tell me, you know, that's, that's the number we're looking for.
And you can go back 2019 and earlier for many years, you know, 14, 15, 16, 17, we were.
Past, sort of the, you know, the, the great debacle of 2008, 2009.
We were in a pretty steady state.
Debt was very, very cheap.
It was an active market and you saw a lot of growth, particularly in those growth markets.
I happen to live in Texas, so you know, Texas and the South, and Florida, Georgia, the Carolinas, things like that, Tennessee, where you're at really just, just taking off and doing very, very well from a credit perspective.
Then COVID hit, uh, and changed the world and the, the phrase that we used for.
Gosh, five years was unprecedented times, and I'm gonna come back to that because we're sort of back into unprecedented times.
Mm-hmm.
But we all sort of know what happened.
Uh, 2020 hit, we curtailed our elective surgeries, uh, and, and things that.
We, we unfortunately say that makes the money, you know, when, when I'm cutting on you and I'm taking something out or putting something in that pays the bills far better than medical does, so to speak, or just, uh, uh, just sort of intensive watching observation, things along those lines.
So when I clamped down on that, and the only thing I could really take was through the emergency room, we just saw margins plummet, and, and they, they just, they just went.
Straight down, and you can imagine what happened, the, the, the old joke, you know, uh, fee for service, uh, no fee, no service, no service, no fee, uh, is basically how we ended up discovering how, how fragile the system can be, quite frankly.
So we hunkered down a lot of the people that we rate.
Kept going full bore with paying salary, wages and benefits.
They're like, we know this can't last forever.
And the last thing we, we don't want to be is not a good steward to the number one thing that makes, you know, makes us tick.
And that's our people.
So I, I can rattle off a dozen different names.
I won't.
That said, look, we kept people on board.
Even though there was no volumes to service right then, because we knew it was the right thing to do.
We have these very good balance sheets, why not use them?
This is a great reason to do them.
So they took unnecessarily large losses.
Really, if you think about it, in 2020, life came roaring back in 21.
So that actually is an abnormally good year if you look at it.
Two things.
One, we got the vaccines, people started taking the vaccines.
Uh, life.
Got back to normal.
And you gotta put that in big air quotes, 'cause it's never really gone back to normal.
But we started servicing volumes again, and the volumes came back.
There was a, a significant period of time and a lot of people thinking the volumes are not gonna come back.
I'm, I'm afraid to use the er, I'm afraid to go to the doctor.
And, and everyone was wearing masks and, you know, the whole, the whole spiel.
But the reality is volumes came back and then you have to look to the federal government that stepped up and released this CARES act, if you will.
Real meaningful stimulus dollars out there into the system.
So combination of those two events, a lot of extra cashflow coming in because of stimulus or provider funds, however you wanna look at it.
And the volumes coming back.
This is a, this is a good thing.
We had a great 21.
Everyone, you know, was sort of celebrating a little bit.
And then 22, uh, which I'll characterize, 22, 23, 24 started, what often we say, well, we had a pandemic and then we had a labor demic.
And, and most people that I talk to would describe it as, look, um.
We always say nursing, but it's above and beyond nursing.
It's sort that universal employee as well as physicians and so on and so forth.
But there was a whole lot of people that said, I got you through the pandemic.
I was gonna retire.
But it was my, my sacred duty, if you will, to to see this organization and this community through this trial that we were facing as a, as a nation, if you will, if not a world.
And when it looked like life was back to normal, we had an above average number of people say.
I'm done, I'm out.
I'm, I'm retiring, I'm, I'm hanging at my cleats, whatever metaphor that you prefer.
And we saw really, uh, an an institution that predominantly always has a labor shortage go into a vast labor scarcity, quite frankly.
And 2022.
Turns out to be probably the worst year I hope I'll ever see in the sector.
We had negative operating margins for just about everybody, and we haven't had negative cashflow margins for a lot of people.
That takes a lot to, to get to that sort of level.
And it was paying your number one expense, salary, wage, and benefits, it's easily 50%.
For some people it's 55, some are 60, and when I'm lumping it in, now I'm talking about this thing called external contract labor.
Agency shift differential travelers, and, and, and you name whatever you had to do to keep your staff.
And I'll throw out the, the highest number that I heard, although I heard a higher one recently.
The highest number that I ever heard was$400 an hour being paid out to an agency.
Now, I don't know what that particular nurse was making pre-labor scarcity, but let's just say a, a big number.
Let's say it's a hundred dollars an hour.
That's an excellent salary.
Now suddenly they're making.
Almost, not themselves, but the agency firm, A million dollars coming outta your pocket for the exact same services being delivered.
And in fact, we, we saw this play out in time and time again in several markets where there was no ability to discharge, like, into like SNS or skilled nursing facilities.
For those who familiar with the term, that was like the worst thing that could happen to you.
So you're getting paid on a DRG basis usually.
Uh, so you've gotten all the fees you're gonna get.
You've got someone sitting in a bed, lying in a bed, doesn't need to be there.
They should be at a lower acuity setting, but there's no place to deter them to, so to speak.
And by the way, I am paying premium salary for no ability to flip the bed and no ability to get more revenues.
And then I, that's just sort of when I often say that, that we learned that, uh, we have something that I've jokingly called the, the 75 75 conundrum that's out there in healthcare, meaning 75% of our uh, uh, expenses, basically supplies and labor, that's roughly 75%.
If you just wanna do the math, those are highly elastic.
I can't.
Pass that on to you as an end user, I just have to absorb and and eat them.
So we had labor scarcity and we had the start of inflation that a lot of people call generationally high inflation.
Certainly, I'm old enough to remember the last time this happened, so it's maybe two generations for me, but some younger people be, I've never seen numbers like this.
Yes, that's the case there.
So your expense base just shot.
Through the roof, and what we found out is that 75% of your revenues basically are fixed.
So Medicare, Medicaid gives you what they pay, self-pay gives you what they pay unless maybe your plastic surgery in California, something like that.
And even those places you can negotiate with.
Commercial, uh, insurance.
So United's, Aetna, Cigna is blues of the world.
You can only open up that can and renegotiate once every 1, 2, 3 years.
So you're sort of stuck in a contract.
And so you, you're really caught in a snowball, so to speak.
And the only way to to work our way out of this was very gradually chipping away at it.
Chipping away at it, chipping away at it, chipping away at it, meaning better recruitment and retention.
Uh, keeping staff more, more, more keepers than leavers that were going out the door.
Less agency, less overtime, less shift differential, premium pay that we were talking about, and then going to my payers and say, Hey, it's time to renegotiate that contract instead of, you know, being happy with that.
Two or 3% that I've been living on for the last couple years, I really needed to be eight, nine, or 10%.
Now, not everybody got that.
But some people did or got halfway there in negotiations and said, instead of three year contracts, maybe I'll do a two year or one year contract and reopen it up more frequently.
So by Hooker, by Crook, most of the organizations that we deal with slowly got to that month by month break even, period.
You know, after the, the labor dimmick hit and we got a little bit better in 23, we can talk about 24 a lot.
'cause we just released those medians.
24 got better.
And to give you an idea, just what that range was in 2022, the median operating margin was 0.2% for our rated universe.
So break even, which means half of our.
You know, the be all, end all kind of credits that are out there couldn't make money outta their book of business.
Some of that was because they chose to do that.
I get that.
The next year in 23 it, it doubled, uh, 0.4, which is basically still break even about half.
Everybody we talked to was not making money, but it tripled this year in 24.
That's.
Slow continued improvement, 1.1% operating margin, and I go with operating margin because I think most people are more familiar with that than op EBITDA margin or cashflow margins, but, but I can stick with that to give you an idea of what that looks like.
The good news is throughout this entire time.
His volume started coming back.
That was, like I said, a great fear for us, but they, but they came back and they came back, you know, very strong.
I would say virtually across the board of our rated world, the volumes are back to pre pandemic levels or better.
In fact, if I hear one thing, uh, these days now, it's not, you know, COVID this or labor that, not that we solved all those problems or anything, but it's access.
Where do I put people?
How do I get them in?
How do I cut those wait times down?
Basic blocking and tackling, as we would say, and we're good at that in healthcare.
We can figure that out.
And so a huge focus on that.
The other really great thing, I think that that was there is balance sheets were at all times strengths.
So, uh, rough number, 220 days cash on hand.
Just to give you an idea that's.
Really excellent.
And if you ignore that one peak year when we were sitting on some extra lines of credit, that's the, the, the 2021 year.
If you go back in time and you look at the previous 6, 7, 8 years and you average it, we had about 200 days cash on hand, something like that.
So two 20 is a really good number and, and it, and it's skewed obviously, the double A, the very strong credits are closer to 300.
And the speculative great credits are closer to 50 or 60, just to give you an idea.
So we had some stability, we had some runway, if you will, uh, with the volumes were coming back, we're figuring this out.
Working my payers life is going good.
We maintained a, uh, a stable outlook in the 2025, and then the world changed again.
Um, and it, you know, started, uh, January 20th at about 4 45 in the afternoon.
The executive orders and executive actions started just flying fast and furiously.
And, uh, I, I don't have the exact stat, but, but something was like, you know, for, for every EO or EA that went out the door, like two lawsuits sprung up, you know, his place like a hydra kind of a thing.
So.
I can remember, you know, trying to respond to those in writing as they were coming out the door and uncertainty rapidly degenerated down into chaos for us on the prediction scales, and again, most of 'em running up in lawsuits, legalities being, uh, question about it or, or things changed, you know, quite frankly.
So a, a, a couple of the big things that really happened was, you know, tariff day.
So I mentioned a second ago, your number one expense is labor.
Number two is supplies.
And so if you take your supply expense and you say.
They go from, you're paying whatever you're paying to 30% more, 40% more.
And, and for a brief period of time with China, at least it was 145% more that's gonna whack your margin and, and really destroy some things.
Now we backed off those, we changed our mind.
It's kind of leveling out now.
Uh, somewhere in that 30% to below sort of number probably settles around there, but we haven't really fully factored in drug and drug costs and things like that.
So that's still under duress and still sort of giving us a hangover.
But what really.
Change was sort of this, uh, HR one, uh, the one big beautiful bill act as a lot of people sort of, uh, sort of call it.
And, uh, as everybody probably on the, on the listening, you know, things here knows, it, it tackled kind of the rails.
No one thought people would go after, uh, and, and know Medicaid is, is, is spot on in the crosshairs.
Uh, I think a lot of us, myself included, were a little surprised that the house passed a bill so harsh against it, if you will.
Uh, and we thought, well, surely we'll sort of die in the Senate, in the Senate.
It didn't quite double down, but they bundled it back up and threw it right back.
And of course, you know, it passed.
It was signed into, uh, signed into law and we're waiting to see where the devil of the details are.
We have not, uh, and I appreciate you reading our stuff.
Um, I'll, I'll buy you a drink next time I see you for that.
Um, but we did not change our outlook on the sector.
We really wanted to see what this bill would look like.
And the reality is when you look at the bill, it does not say anywhere in there on January 1st, 2026, just to pick a random date a few months away that 10 million people will be dis-enrolled from Medicaid.
It doesn't say that.
Now, there are some roadblocks that have been put up.
Most common ones that we're talking about are things like, uh, job certification, uh, you know, you've gotta be volunteering or working or something along those lines.
Re-up twice a year and, and.
Subtle roadblocks up to make it just a nuisance to renew, but not impossible to renew.
And so it, and then those don't even kick in really until 26, 27 kind of timeframe.
So I think we got this big, you know, we, we, we've, we've got a, a glancing blow.
Let me comment say there, there's nothing good in HR one for healthcare as far as I'm concerned.
If it's there, I haven't seen it, I can't figure it out myself, but it generally speaking is gonna go after your, your breadbox, your, your payer mix, and it's gonna go after, um, your revenue stream.
And it's not necessarily gonna help.
The expense stream in any way, shape, or form.
The numbers that we keep hearing in terms of, of Medicaid coming off the rolls, anywhere from 8 million to 10 million to I've read as high as 17 million.
Uh, no one really knows.
And if we're being fair, predicting human nature when it comes to healthcare is not an exact science.
Um, if you remember 15 years ago, we were in the same position talking about the a CA. And those who liked the A CA, were predicting how many people will join and what that will look like.
Those who did not like the a CA, you might remember, we're talking about dumping onto the exchanges, was the phrase that we're using millions and millions and millions people be dumped on it.
Neither one happened exactly as predicted, and I submit to you that neither will happen what we're exactly saying today.
But it still isn't good.
It's going to take self-pay, numbers will go up, and Medicaid numbers will come down.
Exchanges were very likely come down as well as those subsidies begin to expire.
And so you, you sort of mix it all up in the bucket and expenses are still under duress.
And now your revenues are gonna be under risk 'cause your payer mix is gonna change, change subtly, but will change meaningfully, quite frankly.
So we're waiting to see where all this goes.
We're still stable on the sector.
Uh, and, and the outlook because of what I mentioned earlier.
Volumes are good.
Volumes are strong.
We got a little bit of a reprieve here.
Sort of figure things out.
You know, I was, I was blessed to be on a stage with, uh, with Dennis Dahlin and sort of the very tagline of the HFMA conference was.
We'll figure it out, you know, we'll figure it out and we kind of, you know, we, we, we know we'll and so we've got a little bit extra time to figure it out, so to speak.
And I think that was a, a, a common theme that you heard at that conference, quite frankly.
So we've got a little bit of time to figure it out.
And again, balance sheets, you know, very strong giving you that, that, that runway.
We have not issued as much debt in the last couple of three years during COVID and, and things like that.
So we built the balance sheet strength up.
If I had a number, I had a measure that I looked at.
The most importantly, uh, is cash to debt.
And so you, you can control what you borrow, generally speaking.
And so that's a number that you can control for the most part.
And it turfs out at about 170 or so as a median right now.
So again, most of our portfolio can repay their debt almost two times over.
That's a lot of good cushion.
So we tend not to take knee jerk reactions on credits like that.
So I said a lot of things there, so I talked a little bit there, but that's sort of is the lay of the land.
And as we move into 25 into 26, I would say uncertainty, uh uh, unprecedented, these are words that we're gonna start bringing up again.
I would say that the level of uncertainty.
It reminds me distinctly of the early days of 2020 when we got this virus and no one knew what it would do to you or what variant we're on, and would we survive it or not.
And, and the world is a little bit of a chaos in the healthcare space.
I, I think we're rapidly approaching that right now for the, for the interim.
Um, and then who knows what happens in the midterms and all sorts of things.
So there's just a, there's a, there's a wild bunch of things outside of our control, uh, in the space.
That we're going to have to deal with and figure out.
Uh, but I think it's one thing, the sector has been very strong over the last, you know, 40, 50, 60 years we've seen prospective payment systems.
We've seen the BBA, we've seen a worldwide pandemic, and yet we, we still shrug it off and we do okay.
Not everyone will, I think this time, unfortunately, uh, particularly smaller rural hospitals with already deepening, worsening payer mixes that are just gonna get unfortunately deeper and worser.
And you can't just pack up and move.
We don't do that like our corporate headquarters or anything like that.
So, you know, I'm in Dallas.
If I decide I didn't like Dallas, I could pack up and move to Albuquerque or something.
But, but we don't do that in healthcare and so I, I think.
You know, the, the final, um, chapter has not been written on HR one and where the sector is going to go.
I, I think we are cautiously optimistic.
We'll work our way out of this thing, but again, there's no good news in that for us in the sector, quite frankly, we're going to have to work as they say, you know, harder to run the same speed, you know, jump higher to, you know, jump the same, same height kind of a thing.
It's going to be a challenge for the sector.
That was fantastic.
Okay.
I've got two trailing questions, then I'm gonna turn it to Vic, so, okay.
Uh, the first one is, uh, I heard you focus a lot on Medicaid.
Um, there were obviously other things that happened in July, both on the HR one side and on the PPS side.
Um, and you know, the two I want to bring up are, uh, provider taxes, uh, and, uh, slight nut, slight neutrality.
Can you, can you just talk a little bit about both of those and like how, how you factor that into, because I guess.
Those seem a little less, uh, uncertain.
So you're right.
There's, there's great uncertainty.
And I think the things that have been hitting the headlines have been the, you know, x number of millions of people who will lose, you know, Medicaid coverage.
Right.
And, and, and, and logically probably go to self-pay, which again, in the sector we call self-pay no pay many times.
And so it worsens your payer mix.
But the two things that you mentioned, there's, there's a third one, which we can talk about as well too, which is three 40 B. Mm-hmm.
Which really is.
Is not a governmental program.
It's more on the, uh, the pharma, if you will, but that's a whole other story.
It often gets wrapped up in this conversation as a pain point.
But is site neutrality site neutrality for those of you're not familiar with?
It is right now we, we get a different fee, a better fee, if you will, for doing an MRI scan, say, in the hospital because the hospital's got, you know, more infrastructure in place.
We've been.
Doing this as long as I've been in the, in the sector, you know, good 25, 30 years now, moving a lot of that lower acuity stuff into the outpatient side of things.
Right now, depending upon your licensing, you can sort of charge the higher amounts that you might get into a hospital, but there's a lot of payers that are out there, governmental or otherwise.
It says, look.
We wanna be site sort of neutral on this thing.
I don't care where you get your service in the hospital.
Outside the hospital, we're gonna pay you one fee, that lower fee, so to speak, which means your revenues come down, that sort of a thing.
Now, if you can transition that and, and all the rage right now is, is buying up and partnering with, you know, ambulatory surgery centers for procedures and imaging centers for work.
Uh, the diagnostics and, and, and, and things like that.
And that's a trend that's been going on forever.
And, and again, I I, I submit to you that we know how to do this and we can fix it.
Mm-hmm.
Uh, but as long as it's still not completely broken, we'll, we'll probably not make a big her herculean leap into it.
We'll sort of say piecemeal, piecemeal, piecemeal, and then eventually make, you know, make a, you know, a, as we used to say in graduate school, A, BHAG, a big hairy, audacious goal kind of movement into it.
And I think you're starting to see a few people begin to do that.
Um, the other ones have to do with, um, what I'll just lump in general called, you know, supplemental payments, so to speak.
And so there are, uh, uh, about 40 states out there that have got provider taxes.
Um, and you pay into it, uh, goes up into a big pool and, and like intergovernmental transfer kind of goes to Washington.
Magically multiplies and then sort of gets pulled back down to the states and gets distributed back out, which means you're getting a little bit more than you put into it.
So 1.5 to one, something along those ratios.
Um, California probably the biggest, most recent one, and even that one, I'm dating myself now.
It's probably 15 years old now.
But that one at a period of time was certainly a lot of dollars.
'cause it's a big state.
Um, and, and, and then had to be re-upped every, you know, 18 months or so.
And so from a, from a rating analyst standpoint, it caused a lot of lumpiness in the numbers.
You might get six months, they might get 18 months, you get six months, is it gonna get renewed?
A lot of uncertainty.
And, and what this bill is also put into play is that if you didn't already have a program going.
We're not really gonna authorize any new programs.
So if you've got it, you've got it.
But we're gonna start ratcheting down on that kind of, if you will match coming to you from the federal government.
And that's gonna shrink the size of the pie.
And you know what they say when the size of the pie shrink, the table manners just go out the window sort of thing.
So if you already have one in place, or you got into the wire, you're, you're looking pretty good.
You might get a little bump actually in 20 25, 20 26, but at some point the ratcheting down will catch up to you.
And if that doesn't change, then the, the whole.
Pie itself gets a little bit smaller, it's worth a little bit less than it is.
There's fewer ways for you to sort of, I'm gonna use this word, people, it's a, it's got a negative term cost shift, if you will, but I can't cost shift anymore 'cause I don't have any of those, if you will.
Um, you know, prospective payments that are out there that are coming my way, or supplemental payments that are coming my way that can sort of help do this one, the biggest one being with, um, you know, directed payments with, with Medicaid, quite frankly.
And that just starts to dry up.
And again, that cuts into your revenue stream.
Mm-hmm.
So.
Expense is still under duress.
Revenue's gonna be under duress in a few more years unless something big changes that starts to paint a bit of a grim picture, you know, for the sector.
Um, are we negative yet?
Nope.
'cause we've got some running away.
Uh, we got some balance sheet strength to rely on, but if the Geiger counter doesn't move and doesn't change and stays, you know, ticking at a certain pace and a certain level, yeah.
We're gonna feel it.
We're gonna feel it.
Alright, final question and then handing it over.
Uh.
Hearing what you're saying, especially as you talk about the events of this year and l less so, the, the, you know, independence, uh, or what, what was the tariff day called?
I can't even remember anymore.
What, what did he call it?
Uh, it was Independence Day.
Yes, it was Tariff Day.
Yes.
Yes it was.
Yes, it was.
Yes.
Okay.
So, so, uh, leaving that to decide, but really the events of July.
You are looking more.
Again, I love that you, you gave us that definition of, you know, the ability to pay off debt, right?
So you're looking at the cash on hand and the debt, and you're saying today these organizations, you know, I don't care about what's happening in 26 to 27.
Um, is, is is the rating.
Sort of hyper-focused on that.
And the rest of the analysis is like maybe it paints a predictive picture.
And maybe you go into your interviews with the different organizations that you're rating and you ask them how they're equipped to handle these things.
But at the core, like, I don't know if there was like a weighted scale of things that you use to determine when it's time to change a rating at the core, that day's on cad, that that, uh, cash days on hand.
And, uh, and the debt numbers that, is that really like the, the outsized weighting variables into the credit analysis process?
It, it is.
And if, and if I have to be fair, you know, we at Fitch updated our criteria about the same time I got here, and we definitely moved our lens, if you will, from operations more to balance sheet strength.
All of our data indicated that that was the single couple of.
Points, if you will, that um, connotated long-term success was a good strong balance sheet.
And look, I've been to other agencies and if you ask most, most analysts, and, and up until we changed that criteria, you say, well, what do you like?
Operations or balance sheet?
I'd said, yes, both.
Love them both.
Now I really say, look, if I had to choose between the two, I'm gonna choose that balance sheet over the operations.
They can kind of go up and down as long as you can figure out.
You know, as some people say, pick your way through that gray and stabilize it, then you're gonna be okay because that balance sheet buys you some time.
The number one question we get, um, usually from the buy side and then from the banking side, well, how long is the runway?
And I, I, I wish I could say, you know, it's, it's 47 more feet or something along those lines.
But the reality is it's an old consulting answer I used to give people.
It depends.
It depends on your situation, your market, essentiality, how big that war chest is, what kind of volumes you're seeing, and there's just no one size fits all.
But you are spot on that if I, I don't like to take, you know, a a thousand years of, uh, uh, of rating, uh, uh, acumen in my team and then say, but it's just one measure.
Uh, but the reality is if you had to, yeah, I'm gonna say cash to debt is the measure that we're gonna look at and we're focused on can you pay that debt.
By the way, a debt rating, uh, is not indicative of do we like you as people?
Uh, it's not even, uh, at face value.
Your quality, although all things are linked to quality on some level, and on some inference it doesn't.
Have anything with your cool logo or, or, or, or something like that.
Or even size and scale necessarily.
It's a blanket statement of can you repay your debt on time and in full.
So as much as we had these great conversations about the in full, you know, we do have a few people rated pretty low.
We're like, can you make the bond payment on Thursday?
You know, because that's the on time piece of it.
Mm-hmm.
Um, and those are difficult conversations.
No one wants to have 'em, and we don't have 'em frequently.
But that's something that we have to consider about too.
And as you get.
We call it compression or expansion.
So as you get higher up the scale double A you get, you get rating compression.
It's hard to go from a double A minus to a double A, double A to a double a plus.
That's effectively as high as you can get in the sector.
But once you fall into like single B category, I mean you can go single B down in a triple C down into single C very quickly.
You can fall off that cliff.
You get expansion quite frankly.
And so that also determines kind of how fast or how quick we'll move on a on a credit rating.
Thank you, Vic.
You bet.
Yeah.
Thanks Kevin.
So I guess, um, the way I think about this, Kevin, is your rated universe, the hos, the health systems that are coming to Fitch.
They are the best of the best out there, and at least they have hope that there'll be investment grade.
And so I guess, is it fair to say as a recap of your sort of, uh, last five years, that the, the rate of universe, which really is the best of the best was sort of trending at a 3% operating margin, went down to zero, maybe even a little bit negative.
And now it's back to something like half of that.
I think that's what roughly what you said.
That's exactly it.
Yep.
And I guess my question is, is it fair to say that.
The universe of health systems that are not rated by Fich, who, who maybe are not.
They're, they're seeking local, the local banks providing debt, they don't need a credit rating.
Uh, and if they went to get the full rating, it, it might not be investment grade anyway, so that they don't wanna pay the fees and go through all the effort to then get back that they're not investment grade.
I think that's what you're saying.
I would imagine those host health systems had the same trajectory where they probably were not at 3% coming into the pandemic.
Correct.
Maybe at two or even one and a half, they went down even lower.
And now are they at zero or like, is it the same relative?
Uh, I'm trying to use your universe.
To get a flavor of how the overall system is performing.
Yeah.
I, I, I think that's a, that's a fair analogy, uh, to, to use that sort of as the framework of the rubric, if you wanna look at rated or unrated, uh, uh, credit characteristic.
Yeah.
We just don't ever see them.
I can't prove it factually to you.
Right.
Yeah, we don't, certainly what I hear out there that, that, that makes sense as well too.
But you've hit upon something that is really the underlying, you know, worry about us in the sectors.
Is this new?
1%, 2% pick a number.
Is that our new normal going forward?
And if that's our new normal, what do we do about it?
And then who survives?
And if it's the new normal, for the best of the best, you know, is the whole industry going to be able to continue forward in the same structure?
I have some nervousness about that'cause, 'cause your 20% really is the, the cream of the crop, the, the best tends to be the cream of the crop.
And matter of fact, you, you, you, you, you mentioned, it's something I wanted to bring up, which is we actually started using several years ago a phrase called trifurcation of credit quality.
And so, uh, for years, uh, I've been doing this, you know, 25 years or however long I've been doing it, we would talk about the bifurcation of credit quality, kind of the folks that we rate and we see and, and the haves.
Again, I hate to like to use that phrase and the ones that really struggle.
And what we really saw through sort of, you know, pandemic labor, demic was some organizations, you should never say this in healthcare, have been killing it.
You know what pandemic.
Labor demic, we're making still 8%, 9% margins and, and they're doing great.
Those typically tend to be in high growth states where the payer mix is very favorable.
Not always.
We can talk about that if you like.
Then you've got a whole bunch of people that are in those really tough markets.
So, you know, rust belt towns, uh, towns that are, are aging rapidly in place.
They're pair mixed.
By by doing absolutely nothing.
It's going from commercial to Medicare and a lot of times, you know, if it's not Medicare, it's Medicaid, and it's depopulating, it's shrinking kind of towns at the time have forgotten.
There's very little they can do to pull out of that trough that they're in again.
Other than pick up and move, and we just don't do that.
And so they're really suffering, quite frankly.
But then there's this huge swath right in the middle, and I can tell you when I say, you know, succeeding, doing well does not indicate that everybody isn't working their tails off in the sector.
They're working their tails off in the sector.
But the headwinds have been so strong.
It just looks like you're paddling on a, on a, you know, a duck on a lake.
You, you, you can't see the feet moving as fast as they can.
All you see is a duck just not moving.
But they're really trying everything they can.
Just to stay level if you'll, and so I think that that paradigm as well, I think we're gonna see continue for the next several years.
And I think you might even add on things like, you know, the buzzwords of AI and it, if you have got that wherewithal and the war chest to invest heavily in that and go big, you're probably gonna set yourself up to be one of those.
I'm killing it.
I'm a succeed.
Whereas if you don't have that, you're gonna unfortunately fall on the on the side.
That's really struggling.
That's deteriorating.
Yeah.
One of the things we've been talking about on the show is that there's a lot of fixed asset investment in healthcare that are physical buildings and, and, you know, big capital equipment that you really can't shift around very easily.
So you made it, you made a decision maybe 10 years ago to buy a facility in a rural part of the state where you are.
And if you could go back, you might not buy that now, but you have that asset and you have to figure out what to do with it, which is a, you know, challenging.
Set of strategic things to think through.
It's challenging.
And I tell you what maybe has pleased me the most about the sector is, is, um, some of the, the very large organizations that we work with, you can, you can name them all.
Um, they're in, you know, 15, 20 different states.
They've got.
To 150 hospitals.
You know, that size of an organization I think has gone through a maturation process.
So for a long time, you know, eighties, nineties, it was sort of partner up for the dance and uh, you know, get big in size and scale and all of this.
And I think there's just been a realization for a lot of those organizations look.
I can't be all things to all people in all places at once.
What I can be is, you know, most excellent where I've got that market essentiality, that density, that indispensable.
That's where I wanna sort of focus, if you will, my energy, my capital, you know where I'm going to invest in.
So you sometimes are seeing some shrinking.
But shrinking down to what I would call core markets, and you'll see growing from there, quite frankly.
And I think that's a very good, healthy outcome that we're seeing among some of our largest credits.
Size and scale does not directly connotate immediate success, by the way.
Uh, it really suggests kind of a, a, a sweet spot about, uh, 18 billion to 20 billion is a really good number, but I can remember when we were talking about size and scale and it was like, well, 2 billion to 4 billion, and that became four to eight, and then eight to 10 it just kept getting bigger.
Where's the capper?
It looks like the cappers right around.
20 billion or so in terms of do you have good operations?
Do you have strong balance sheet and your size and scale?
Yep.
Those are, those are all kind of dovetail together kind of nicely, but I, I do like that sort of maturation that we're seeing from some of the largest, uh, organizations that we work with.
I think that's, that's, that is very good for the sector, quite frankly.
Good.
And just a minute on the continuing care retirement communities, we, we covered on the show, at least for me, was a pretty scary wake up call in the journal with a, a New York City Community Care continuing care called Harbor Side went bankrupt.
And a lot of times the, the patients or the, the, I guess what they're called with the, the residents, maybe they kind of buy in.
Mm-hmm.
Um, but then in the bankruptcy process, they lose that.
Uh, and then they don't have the ability to buy into a new place.
So I wasn't aware that Fitz was rating that, but um, it's a really important service to be able to talk about the credit worthiness for the residents moving in because it's a big commitment, obviously.
And once you make that commitment, it's it, you're there.
Um, unless something bad happens, you're there for the rest of your life, so, right.
Um, talk about that practice.
What percent of the retirement communities are you covering and how should we think about that market?
Yeah.
I wish I had Margaret or Gary on with me.
There are, there are approach.
No.
Could answer this question for you, but I I, I'll answer far smaller.
Mm-hmm.
So we generally only work with and rate with people that, that we want to work with and rate, uh, quite frankly.
So it's not about building the practice or anything Yeah.
Certain like that.
But, uh, when I said only two credits that I could ever think of ever started day one, brand new rating, non-investment grade, that was the hospital side, so a double B kind of a rating, which is still non-investment grade.
Even single B is not uncommon out of the gate for CCRC or as we call 'em, LP.
See a life plan community.
It's not really common, but it's not uncommon either.
So it's a different sort of scale, if you will.
So the average, uh, median rating in hospitals or health systems is an a plus.
The most common is a double A minus in our portfolio.
You need to take that down, you know, good six notches or so, uh, for the other side of the house.
Where a, a triple B, a low single A is an excellent rating in LPC land, but we also see plenty of triple B minuses, single Bs, uh, double Bs, things along that lines.
It's much more spread out, much more diffused.
But you're correct.
If you have guidance for, like, if you were gonna send your parents or I was gonna spend my parents.
To a place.
Is the, is the credit check something that one should be doing as you look at this, do you think?
Is that Yeah, abso, absolutely.
Um, and we can talk about this offline, but you definitely want to go tour the place.
You want to have a meal there.
You wanna see how they treat their, their staff employees, and you definitely wanna get that credit score, credit rating to see where they're at.
Do they have the wherewithal to be a, a going concern forever and ever?
Amen.
Uh, I was distraught when my parents went into a, uh, for-profit that we didn't rate, and I had no insight into the, the numbers.
Or anything like that, because that's what I was missing kind of a thing.
I did everything else, but I couldn't get any insight into the numbers and it kind of just drove me a little, a little twitchy, quite frankly.
Uh, but the reality is, you know, some of these organizations, uh, got huge balance sheets we're we're talking days of cash on hand and in the thousands or several hundreds.
So they know they need that cushion because they in theory have to pay back if they can't return a unit and flip it and use that fund funding, if you will, to sort of buy out the contract.
Uh, so a good healthy operations there is actually.
Much more important, uh, than it is in sort of the hospital side of things.
It's more important to be good operators, great operators on the, on the skilled facility sides.
Yeah.
Interesting.
Well, of the things we have to figure out in aging, we add a new one to the list, I guess is a Absolutely.
We, you know, we do not do aging well in America.
Uh, I have, uh, taken care of my parents for a while, taking care of my dad still.
And, um, it's not something we do really well here.
And, uh, it's very expensive.
It's time consuming.
And when you find that right place for your mom, dad, brother, sister, whatever it might be, you know, hold onto it with both hands.
'cause you found a gem in the rough and you wanna make sure you keep that.
Uh, yeah.
Keep it a secret kind of thing.
Amen.
Uh, Kevin, we're we're at time, uh, but just wanted to see if you had any, you know, final notes, uh, you know, for, for our listeners, for Vic and myself, uh, about the outlook of, uh, you know, healthcare in the United States.
Yeah, I, I, a final note is, um.
I, I've been obsessed with this guy named John Gaal, as of lately, who wrote a book about systems.
Uh, it was more like a, a, a pamphlet in 1975.
But the, the premise of it is, you know, complicated systems fail in infinite number of ways.
And so if you cut to the chase, you know, the best ideas and the best solutions are often the simplest ideas in the simplest solutions.
And so, don't overcomplicate it.
Don't overbuild it.
Take a step back, measure twice, cut once and then see what you can get with the whole thing.
So, I, I've.
Been, uh, hunting the copy of that up one of these days, I'll find an original of it, uh, because I bet only about 10 were published or something.
But I, uh, I, I wanna read it firsthand and see if I can get some more, uh, good, good, good nuggets outta that whole thing, so, um, take your time.
We'll figure it out and it, it'll be all right.
It'll be all right.
It might be a bumpy ride, but it's gonna be all right.
Yeah.
Amen.
Well, thank you so much Kevin, and uh, you know, maybe we'll get you back here in a year and see, you know, what's actually materialized, uh, you know, versus what sort of blew up in the courts or, or Exactly.
It could be anybody's game in a year from now.
Exactly.
Yeah.
Absolutely.
Exactly right.
Never dull moment in the sector.
Absolutely.
Alright.
Thanks so much my friend.
Thank you.
Yeah, you bet.
You guys take care.
Be good.
Alright.