Kaufman Hall’s 2025 Spring Rating Agency Update provided a comprehensive overview of key financial and regulatory challenges potentially facing healthcare providers. From Medicaid funding concerns to shifts in payment models and capital access, hospitals must continue to adapt to an evolving landscape. Financial discipline, strategic planning and effective engagement with the rating agencies will be crucial for maintaining stability in the years ahead.
Our panelists included Suzie Desai, Senior Director, S&P Global Ratings; Kevin Holloran, Senior Director, Fitch Ratings; and Dan Steingart, Associate Managing Director, Moody’s Ratings. Here are 10 key takeaways from our conversation with them.
1. Potential reductions in Medicaid funding
A top concern for health system leaders is the uncertainty surrounding Medicaid funding reductions. While no concrete policies have been enacted, health systems are bracing for possible cuts by engaging in scenario planning. Organizations are assessing where they can reduce services or consolidate operations to maintain financial stability; some hospitals are considering centralizing services to reduce costs.
Healthcare organizations have gained resilience over the past five years, learning to navigate sudden financial shocks, particularly during the Covid pandemic years. However, the expectation remains that any Medicaid cuts will be painful and will negatively affect health systems' financial health.
We asked about our panelists about the impact of state-directed payment programs (SDPs) and their potential discontinuation by the Centers for Medicare & Medicaid Services (CMS). The panelists agreed that states reliant on federal Medicaid funding, such as Washington, Louisiana, Virginia, and Oregon, could be particularly vulnerable. The loss of SDPs could significantly impact credit ratings, especially for health systems heavily dependent on these funds. One panelist mentioned a health system that has already received a negative outlook partly due to its reliance on SDP funding.
2. Federal policy and regulatory uncertainty
Potential Medicaid reductions are just one part of broader uncertainties stemming from Washington. The panelists compared the current environment to the early days of Covid, when hospitals struggled to forecast operations.
They also noted that regulatory changes often end up in court battles, creating prolonged periods of uncertainty. This can make financial planning difficult for management teams, leading to cautious budgeting and expenditure strategies.
3. Loss of tax-exempt status for private activity bonds
Another possible policy change could result in hospitals losing the ability to issue tax-exempt bonds, which would significantly increase borrowing costs. While large health systems might be able to adapt by leveraging reserves or exploring other financing options, including taxable debt, smaller hospitals could face significant difficulties in accessing capital markets.
If the benefits of tax-exempt status are eroded, not-for-profit health systems may start behaving more like for-profit entities. This shift could have an especially significant impact on vulnerable populations. The panelists agreed that this could cause a real sea change in how healthcare is financed and delivered in the U.S.
The panelists also noted that, while much of the focus has been on federal policy changes, challenges to tax-exempt status are happening at the state level as well.
4. Consolidation and merger & acquisition trends
Given increasing financial pressures, panelists discussed whether hospitals might turn to consolidation. While M&A activity may rise, regulatory scrutiny from the FTC could limit large-scale mergers; there are no clear indications that the FTC is stepping back from the former administration’s more aggressive scrutiny of mergers. The panelists also noted that there has to be a strategic rationale for a partnership beyond enhanced cost efficiencies or access to new markets.
5. Site neutrality and payment reforms
On the question of site neutrality, a policy aimed at equalizing payments between hospital outpatient departments (HOPDs) and independent physician offices, the panelists noted that health systems have been adapting to this shift for years as care has moved outside the hospital and they have expanded their outpatient networks.
For just as long, hospitals and payers have been butting heads on appropriate payment: hospitals argue for a higher payment rate to cover the costs of providing 24/7 emergency care, for example, while payers argue that care delivered at a less expensive site should be reimbursed at a lower rate. The panelists agreed that the payment system will inevitably update to reflect the fact that so much care is being provided outside the hospital, but it should be manageable if it is done on a phased-in basis.
6. Growth of Medicare Advantage plans
With Medicare Advantage (MA) enrollment now around 54% of beneficiaries, health systems are grappling with increased denials, pre-authorizations and lower reimbursement rates. The panelists noted that many health system executives express frustration with MA plans due to delayed payments and administrative hurdles. Some providers are terminating contracts with MA insurers or renegotiating agreements to include stricter payment terms.
Hospitals with strong market positions are better able to negotiate with MA insurers, and some hospitals are becoming more selective in their Medicare Advantage partnerships to minimize financial strain.
7. Tariffs and supply chain challenges
With respect to the impact of tariffs on medical supplies, the panelists pointed out that many critical medical devices – such as imaging equipment, surgical instruments and disposable supplies – are imported. Increased tariffs could drive up costs, further straining hospital margins.
Health systems are responding by stockpiling essential items, negotiating with multiple vendors and seeking domestic alternatives. Larger health systems may be better positioned to absorb cost increases due to their purchasing power. Smaller hospitals could face greater financial pressure, although participation in group purchasing organizations (GPOs) can provide some relief.
8. Operating margins and credit ratings
A webinar attendee asked our panelists whether rating agencies would be more lenient on operating margins given current uncertainties. While the past few years have been challenging, the rating agencies had expected to see improvements in 2024 and beyond to get some running speed before the last Baby Boomers turn 65 in 2030. If current uncertainties impede the ongoing recovery of operating margins, more negative outlooks and potential downgrades could follow.
Panelists agreed that financial flexibility, strong balance sheets and strategic capital investments would be key to maintaining creditworthiness in the face of ongoing challenges.
9. Importance of cash reserves and financial planning
In the words of one panelist, “cash is the ultimate mitigant”: liquidity remains a critical factor in rating assessments. Hospitals with strong cash reserves and access to credit lines are better positioned to navigate uncertainties.
Management teams should focus on scenario planning and identify areas where they can cut costs or reallocate resources. Organizations should also be proactive in assessing financial risks and adjusting their strategies accordingly.
10. Communicating with the rating agencies
As the webinar concluded, we asked our panelists to share insights on how hospitals and health systems can effectively communicate with the rating agencies. They emphasized:
- Transparency: If an organization anticipates any meaningful impacts on its operating or financial performance, the rating agencies would like to hear about it directly from the management team.
- Scenario Planning: A demonstrated awareness of potential financial risks, mitigation strategies and contingency plans is critical.
- Strategic Focus: Management teams should highlight how their strategic initiatives are positioning their organization for long-term financial sustainability.
While every healthcare organization has its own presentation style, the rating agencies always appreciate clear, data-driven presentations.
Conclusion
The high level of uncertainty in the healthcare sector today was a consistent theme of the webinar. While the outlook remains challenging, hospitals and health systems have become more resilient in adapting to financial pressures.
We will reconvene with Suzie, Dan and Kevin during the summer to assess developments and see if there is more clarity around the issues outlined in this summary. We thank them again for their participation in our webinar; a full recording is available on our website. Look for more information about our Summer Rating Agency Update later this spring.
