Hospital rating downgrades declined in 2025 while the number of upgrades increased, resulting in a lower ratio of downgrades to upgrades and tempering higher downgrade activity in recent years. Growing volumes, increased supplemental funding and better labor and expense management contributed to improved financial performance for many borrowers. Upgrades and downgrades included a wide swath of hospitals including academic medical centers, children’s hospitals and regional and national systems, as well as stand-alone hospitals. The overwhelming majority of ratings were affirmed, providing support for the rating agencies’ stable (Moody’s and S&P) and neutral (Fitch) outlooks for 2026.
Five key takeaways:
- The ratio of downgrades-to-upgrades narrowed in 2025. S&P’s ratio declined to 1.4 to 1 from a much wider 4.5 to 1 in 2024. Fitch’s downgrade-to-upgrade ratio was nearly even at 1.1 to 1 in 2025 compared to 1.5 to 1 in 2024. Moody’s reported a reversal with more upgrades than downgrades or a 0.6 to 1 ratio in 2025 compared to 2.0 to 1 in 2024.
- On a combined basis, the absolute number of downgrades and upgrades were nearly even in 2025, which underscored the sector’s credit stability. When combining the actions of all three rating agencies, downgrades declined to 75 in 2025 from 95 in 2024, while the number of upgrades increased materially to 73 compared to 37.
- Rating upgrades occurred across the country and primarily reflected improved financial performance and debt service coverage, demonstrated de-leveraging with improved cash to debt and debt to cash flow, and improved absolute and relative liquidity. Numerous hospitals recognized higher supplemental funding in 2024, although the agencies noted a cautionary view on growing reliance on these funds for cash flow. Upgrades occurred across all rating categories, including some ratings that returned to investment grade from below investment grade as better performance was viewed as sustainable. Some of the upgrades noted durable synergies gained through integration and growth strategies over recent years.
- Merger activity also drove upgrades. Some hospitals saw their ratings upgraded twice during 2025—first, at the time of the merger’s closing, and second as the outstanding debt was incorporated into the legal borrowing pledge of the higher rated system. While these actions involve the same borrower, we count the rating actions as two. Also of note, in many of these merger-related upgrades, the rating was upgraded by multiple notches.
- Rating downgrades mainly reflected weaker financial performance, lower debt service coverage and declining liquidity with some concentration in New York, Pennsylvania, Ohio and California. In other cases, hospitals saw their ratings downgraded primarily due to an outsized debt issuance that stretched the bandwidth of the rating. Multi-notch downgrades continued in 2025, although fewer than in prior years. The multi-notch downgrades ranged from 2 to 5 notches as performance and liquidity sharply declined. We expect multi-notch rating downgrades to continue in 2026 given hospitals’ sensitivity to volume changes, the competitive environment in most markets, and an ongoing shift to government payers, which creates less price elasticity.
The rating portfolio distributions of the three agencies are mainly investment grade. That said, rating distributions show a downward drift in recent years following the pandemic and ensuing labor crisis. The impact of this drift has been mitigated, however, as lower-rated organizations seek a partner for greater financial sustainability. A prolonged dislocation in the equity markets or downturn in local or regional economies could further shift the rating distribution downward.
As noted above, most ratings were affirmed in 2025, and we expect most will be affirmed in 2026. Financial performance for 2025, as seen in Kaufman Hall’s National Hospital Flash Report, continues to hover at an adjusted operating margin of 2.0% through eleven months ending November 30, 2025. Reimbursement changes from H.R.1 (also known as the One Big Beautiful Bill) do not begin in earnest until 2027 and 2028, giving hospitals a runway to build liquidity through better financial performance and investment gains.
