The not-for-profit healthcare sector continues to stabilize in 2026 following several years of elevated downgrade pressure. At Kaufman Hall’s 2026 Summer Rating Agency Update webinar, panelists described a sector with strong balance sheets, stable liquidity, and growing strategic investment, while acknowledging continued operational pressures and preparation for upcoming policy changes.
Our panelists were Suzie Desai, Senior Director, S&P Global Ratings; Kevin Holloran, Senior Director and Sector Leader of the Not-for-Profit Healthcare Group in the Public Finance Department at Fitch Ratings; and Dan Steingart, Executive Director, Public Finance, Moody’s Ratings. Here are five key takeaways from our conversation with them:
Rating downgrades may be slowing, with upgrades driven by improved credit quality
Panelists shared that the pace of downgrades is slowing compared to higher activity during the pandemic and ensuing labor shortage, but the ratio of downgrades to upgrades was mixed. One panelist noted that the ratio of downgrades to upgrades has improved, but another said that downgrades are still outpacing upgrades at a healthy clip.
A noted change from recent years: ratings upgrades are increasingly driven by improved financial performance and balance sheet strengthening, rather than an acquisition or partnership with a higher-rated organization. Downgrades are more concentrated in the speculative and triple-B categories, but there have been a few in higher rating categories as well. Downgrades often reflect weaker performance and cash flow that represent a new, lower level of performance. The panelists noted that a large debt issuance does not automatically trigger a rating downgrade. They are tolerant of “debt swell” if past performance has shown consistent improvement.
Margin medians show some improvement
Early findings from preliminary median analyses suggest improved operating margins in FY 2025 as the industry continues to recover from the Covid-19 pandemic. Below the surface of a slight improvement in margin, however, the panelists see a lot of variability for both systems and standalone hospitals, even as volumes exceed pre-pandemic levels.
The outstanding question is whether financial improvement has reached a peak and is now plateauing. The panelists suggested that current 2026 performance is holding largely steady to FY 2025 medians but will be watching closely to see if margin performance flattens or deteriorates in the months ahead.
Capital spending is back
After years of lower capital spending during the pandemic, the capital spending ratio shows upward momentum, a trend the agencies expect will continue. Higher capital spending includes both catch-up capital from the pandemic and an increase in strategic capital for clinical programs or new capacity. Panelists agreed that spending continues for both inpatient and outpatient expansion. Even as capital spending rises, balance sheets remain strong with growth in absolute cash. However, days cash on hand remains essentially unchanged given higher expense growth.
One panelist reported that cash-to-debt is at an all-time high, providing flexibility for some organizations to consider transformational investments. Yet while overall liquidity remains strong, balance sheets may be masking operational weaknesses in the sector such as a shifting payer mix and other sector challenges.
Healthy patient volumes expose operational challenges as the outpatient shift results in more complex and elderly inpatient populations
As patient volumes stabilize above pre-pandemic levels, they are bringing traditional operational challenges to the foreground for most credits. Rating agencies see management teams increasingly focused on operational efficiencies such as patient throughput, discharge delays, and capacity constraints.
The continued shift to outpatient care is producing two dynamics. The first is an upward trend in case mix index (CMI) for cases remaining in the hospital. One panelist commented that in the past, a CMI above 2 was considered high, but is now not uncommon for a 400- to 500-bed hospital. For academic medical centers and specialty hospitals, a CMI above 3 is not unusual.
The other dynamic resulting from the shift to outpatient care is an increasingly elderly inpatient population. In some cases, the aging patient cohort is shifting the inpatient volume mix to a higher percentage of medical vs. surgical cases.
Artificial Intelligence (AI) investment continues
Rating agencies recognize the important role of AI in revenue cycle, productivity, and administrative efficiency with most AI investments funded through operations. Successful pilots are increasingly being scaled across organizations faster than traditional IT implementations.
Organizations that include AI investments in their rating agency presentations should focus on measurable results and productivity improvements, share successful implementations, and describe how they are being replicated. The panelists agreed that while there is no industry standard to compute an ROI, many hospitals are providing examples of increased efficiencies with AI, such as higher patient throughput.
Other considerations
In addition to the takeaways summarized above, panelists addressed questions regarding payer mix, supplemental funding programs, and Energy as a Service (EaaS) funding structures.
- Payer mix changes: The shift from commercial insurance to Medicare payment is continuing as the population ages. Panelists are closely watching exchange enrollment trends and want to understand how hospitals are preparing for Medicaid redeterminations that will begin in 2027.
- Supplemental funding: Reliance on supplemental funding matters, but the stability of state programs matters as well. Some states have had stable supplemental funding programs in place for many years, while others have made more frequent changes with the development of new funding methodologies.
- EaaS: New funding structures like EaaS continue to be viewed as debt by the rating agencies and included in leverage calculations. Traditional bond financings still dominate as a mainstay vehicle to fund large capital programs.
Bottom line
Since the Spring Rating Agency Update, margins, liquidity, patient volumes, and balance sheets are stabilizing across the sector, although operational pressures and performance variability persist beneath the surface. Capital spending is increasing as organizations move beyond pandemic-era conservatism to replace aging facilities, invest in strategic transformation initiatives, expand outpatient care, and deploy new technologies.
Panelists emphasized that debt alone rarely drives downgrades; rather, ratings depend on the strategy behind those investments and management's ability to execute. As organizations prepare for the impacts of HR1, the rating agencies encourage providers to quantify potential impacts, adjust capital priorities where appropriate, identify operational efficiencies, and clearly articulate mitigation plans. “Don’t bury the headline” is a key reminder for organizations preparing for future rating agency meetings.
Since our webinar, Fitch Ratings and S&P Global have published FY 2025 Not-for-profit Hospital Medians; Moody’s is expected to publish FY 2025 within the coming weeks.
The panel will reconvene at the Therese L. Wareham Rating Agency Panel during the Kaufman Hall Healthcare Leadership Conference on Thursday, Oct. 22. We thank Suzie, Kevin, and Dan for sharing their insights and look forward to continuing the conversation. For more information on the conference, email hlc@kaufmanhall.com.
