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S&P lifts outlook on nonprofit healthcare on Medicaid, M&A activity

Competing ratings agencies Fitch and Moody’s Investor Services have also raised their outlook on the sector.

Standard & Poor's has changed its outlook on nonprofit healthcare from 'negative' to 'stable,' the credit agency reported this week, as a flood of mergers and increased utilization due to Medicaid expansion continues to lift the sector.

Competing ratings agencies Fitch and Moody's Investor Services have also raised their outlook on the sector, a big turnaround from earlier ratings reports that highlighted significant concerns over margins for nonprofit healthcare, which traditionally covers more charity care and cares for a higher number of low-income patients.

[Also: Large nonprofits seeing better margins: Fitch]

According to S&P, nonprofit health systems have shown strong financial gains in 2014, with the net patient revenue jumping above $2.2 billion for AA-rated systems. Revenue gains were seen across all system credit rating classes.

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Mergers and acquisitions are creating systems that are more financially sound, the report said, while stand-alone hospitals are seeing the most struggle. Stand-alone nonprofit hospitals all saw revenue slide in 2014 across all credit brackets.

The Medicaid expansion is also lifting nonprofit healthcare, though there are still several states that have refused to increase the income threshold so more low-income Americans can apply. In expansion states, the expansion has led to a big drop in uncompensated care, which has been a traditional drag on nonprofits' balance sheets.

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Still, like the Fitch report, S&P pointed to a major credit gap between large systems and small stand-alone providers.

The report also pointed to other challenges.

"Continued uncertainty in the sector on multiple fronts, including the imprecise nature of the pace of change to a value model, the role of price and cost consciousness among consumers, potential volatility in non-operating income levels in light of recent significant fluctuations in the equities markets, and the unknown effects of political changes on state and federal health care policy due to future elections," the report said.

Twitter: @HenryPowderly