Market Participants Express Nuanced Views on Hospitals in 2024; More Systems Decide to Pursue Bankruptcy as Business Tactic

The not-for-profit, or NFP, healthcare sector faces well-established challenges: labor shortages, staff retention, ongoing shift to outpatient settings and a gradual decline in pandemic-related aid. But all of these obstacles were exacerbated in 2023, with stubborn inflation leading to even higher interest rates, elevated expenses and underperforming investments. Although certain market participants are optimistic about the prospects of the healthcare sector in 2024, others remain cautious, as many hospital systems still struggle with higher costs and less government support.

Revenues are somewhat stagnant because of contracts with insurers, and although federal aid came through to help sustain hospitals during pandemic years, “this is the first year you are seeing the impact of higher inflation, labor shortages and strikes and the lack of additional federal funding,” said Karel Citroen, the managing director and head of municipal credit research at Conning.

Meanwhile, Kevin Neuman, a principal at Novo Advisors shared his “contrarian opinion” that there would be an uptick from what we saw last year for hospitals as some would manage to get to the 2%-to-3% margin. “That’s historically kind of where they’ve always been, and I’ve been in this industry long enough to know that margins have always been thin in healthcare,” added Neuman, who advises both healthy hospitals and those coping with financial difficulty.

Reorg collected data on where a number of hospital deals were priced throughout 2023 in comparison to the corresponding average AAA MMD yields of each quarter, as shown in the charts below.

Benchmark yields have notably shifted over the past year. The 10-year AAA MMD was 2.31% as of Dec. 19, down slightly from 2.5% in July, according to TM3. In between those two time frames, however, the benchmark underwent a bout of volatility. From July, it rose to 2.95% in August and then rose again to 3.56% on Oct. 6.

In accounting for that shift, Reorg has visualized tax-exempt hospital bond offerings that came to market on a quarterly basis and compared performance to a yield curve of the average AAA MMD during the same period.


The University of Pittsburgh Medical Center, or UPMC, rated A2 and priced on April 4, saw spreads ranging from 40 bps to 120 bps to the AAA MMD. UPMC’s debt maturing in 2053 had a spread during price talk at 120 bps to yield 4.38%. Meanwhile, Mercy Health, an A1-rated deal that priced five months later on Sept. 26, had a spread during price talk for debt maturing in 2052 at 104 bps to the AAA MMD. Mercy Health recently closed an acquisition of the SoutheastHEALTH system, as reported.

Wellspan Health, an AA-rated deal as of Dec. 7, and Allina Health System, an A1-rated offering as of May 2, both priced inside the quarter’s benchmark, according to data collected and calculated by Reorg. The fourth quarter saw a surge of successful healthcare deals that hoped to tap into the primary market, five of which Reorg tracked.

The healthcare sector is also heavily affected by public policy. A provision in the Inflation Reduction Act that was passed by the Senate in August 2022 will enhance subsidies for people buying their own health coverage on the Affordable Care Act Marketplaces, said Vikram Rai, the head of municipal markets strategy at Wells Fargo.

“The extension of enhanced subsidies is a positive for the not-for-profit healthcare sector since there will be fewer uninsured/underinsured patients, and people should be more inclined to seek care, which would benefit hospital foot traffic,” he said. “That said, we do face another subsidy cliff when the enhancements expire in 2025, and millions could face a delayed premium shock.”

These mixed opinions are also reflected in ratings agencies’ outlook for the sector: Moody’s outlook is stable, but Fitch Ratings has healthcare on a challenging outlook, an investor pointed out.

The consensus among participants across different segments of the market, however, is that larger systems will be able to weather ongoing headwinds as they are better positioned to absorb cost increases and optimize their operations.

Although systems with larger, diversified bases of customers and a multistate footprint and those that serve a highly regional population would likely do better than smaller, stand-alone hospitals, Rai said, he would also be optimistic about systems affiliated with academic institutions such as NYU Langone, given its extensive footprint in large metro areas and a wide offering of ambulatory facilities.

The current market conditions have also facilitated a wave of mergers and acquisitions for hospitals where larger systems partner with smaller ones, and market participants expect this trend to carry on in the new year. “As a whole, there are synergies that in the long run are a positive thing,” Citroen of Conning said. “Systems so flush with additional money during the pandemic have bolstered balance sheets.”

2023 was also a threshold year for hospitals considering the bankruptcy route to restructure their debt and improve operations, Neuman of Novo Advisors said. “It used to be this last-resort-type thing, but now people are more open-minded toward it, and it’s become an actual possibility,” he said.

Neuman explained that hospital boards have been observing how other sectors like manufacturing or tech have long sought bankruptcy as a tactic to get their head back above water. The sector used to view bankruptcy as “a failure and a shortcoming,” he added, but now there’s less of a stigma around zeroing in on the economic aspects of hospitals and taking advantage of bankruptcy as a business solution.

In 2023, Reorg initiated coverage on the bankruptcies of the following hospitals:

• Trinity Regional Health Sachse;


• San Benito Health Care District;


• Beverly Community Hospital Association;


• Mercy Hospital Iowa City;


• Heywood Healthcare Inc.; and


• Grupo Hima San Pablo Inc.