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 Can Independent Hospitals Remain Independent? Key Insights for Leaders 

An H2C analysis shows the strongest independent hospitals have financial profiles similar to the strongest health systems.

June 2022

By: William B Hanlon III & Michael J. Tierney

Independent Hospitals are “one crisis away from financial instability,” a Boston Globe headline proclaimed this spring. It’s a scenario driven not just by the challenges of the COVID-19 pandemic, but also a healthcare operating environment that is increasingly difficult for all providers. 

Independent Hospitals are falling in record numbers. Today, two-thirds of the nation’s 5,139 Community Hospitals are part of larger Health Systems, compared with half of Community Hospitals in 2005. Many Independents are stuck in a difficult cycle: Their mission-driven business model yields lower margins, which in turn constrain financials and limit access to capital, resulting in less investment. Less investment results in volume declines and eventually hurts income. 

Yet the strongest Independent Hospitals have financial profiles similar to the strongest Health Systems. These Hospitals are well-positioned to sustain their performance because they have solid market share and a good payer mix. Although Health Systems still have advantages—such as geographic diversity, negotiating leverage, and economies of scale—strong Independents are securing and expanding their market positions to ensure they have the financial wherewithal to succeed. For leaders of Independent Hospitals, this raises the question: “How do we compare to the strongest Independents—and what do we need to do to get or stay there?”

An H2C Securities Inc. (“H2C”) analysis reveals key attributes that separate higher-rated credits from lower-rated credits in the Independent Hospital space. These factors drive a variety of financial performance metrics that align with hospital ratings. At H2C, we believe these characteristics may determine the long-term viability and sustainability of Independent Community Hospitals and, therefore, their ability to remain independent. 

3 Year Average EBITDA Margin and Days Cash on Hand for Health Systems and Top-Rated Independents (1)

Exhibit 1.PNG

(1) H2C utilized a sample of one 192 Systems with over $750 million in operating revenue and the top 10 Independents by credit rating, under $750 million in operating revenue, currently rated by Moody’s


Note: Each plot represents a single hospital, with the size of the plot directly correlated to the amount of unrestricted cash as a percentage of total debt.

Defining Independent Hospitals

For the purposes of our analysis, H2C Securities Inc. ("H2C") adopted Moody’s credit rating criteria that defines Independent Hospitals as hospitals with less than $750 million in operating revenue and Health Systems as hospitals or systems with greater than $750 million in operating revenue. H2C acknowledges there are Independent Hospitals that have more revenue and Health Systems that have less revenue than these thresholds. 

Taking A Closer Look

As a leading advisor to hospitals and health systems, H2C set out to compare Independent Hospitals to Health Systems to determine which attributes are critical to Independent Hospitals’ success. 

For comparison purposes, H2C split the groups by revenue size, consistent with credit rating agencies. The independent hospital group included hospitals with operating revenue totaling less than $750 million, while the health system group included systems with operating revenue higher than $750 million. 

We analyzed 262 providers (70 independent hospitals and 192 health systems), evaluating an array of financial, investment, demographic, market, and operating metrics, including but not limited to: 

  • Historical financial data from the most recent three-year period, with a focus on revenue and margin trends 

  •  Volume data 

  • Key credit metrics, including unrestricted cash, total debt, capitalization structure, and credit ratings 

  • CARES Act funding 

  • Market data, with a focus on market share, payer mix, and local demographic and economic trends 

  • Quality data, including data from CMS, Leapfrog, and other sources 

Our analysis found that while independents can remain independent and enjoy a successful future, several characteristics separate independents with high credit ratings from the rest of the pack. 

Factor 1: Leading market share with limited competition in their respective market. Higher-rated independent hospitals typically operate in markets with higher incomes and healthcare spending, and lower average population. However, the greatest differentiation was in market share. The average market share for higher-rated independents totaled 51.9 percent, compared to 35.2 percent for lower-rated independents. 

Demographic and Economic Statistical Analysis for Top and Bottom 10 Rated Hospitals

Exhibit 2.PNG

Source: ESRI as of February 2022.

Factor 2: A commercial payer mix of 30 percent or greater. Higher-rated independent hospitals generally see a higher average commercial and lower government-funded payer mix. Compared to lower-rated independents, the higher-rated independent hospitals typically have a payer mix that is about 7 percent less weighted toward government-based health plans. Meanwhile, lower-rated independent hospitals have about a 7 percent higher proportion of Medicare and Medicaid revenue than higher-rated independent hospitals. 

When It Comes to Independent Hospital Success, Payer Mix Matters 

Compared to lower-rated Independents, the higher-rated Independents typically have a payer mix that is ~7.0% less weighted toward government-based health plans.

Exhibit 3.PNG

Source: Moody’s MFRA database.

Factor 3: Solid EBITDA margins. Much of our analysis affirmed what industry leaders have preached for years: A hospital with dominant market share and a strong payer mix is likely to earn strong EBITDA margins, and those solid EBITDA margins are the driver of strong and growing balance sheets. 

Factor 4: Strong liquidity profile. A strong market position and payer mix result in improved profitability that, over time, can produce significant liquidity, as measured by days cash on hand (DCOH). In our analysis of 70 independent hospitals, 87.1 percent of Independent Hospitals rated A1-A3 possessed DCOH higher than 250 days, compared to 17.9 percent of those with lower than an A credit rating. However, DCOH is not a factor in and of itself and would be unsustainable absent consistent profitability over time. 

Exhibit 4.PNG

Independent Hospitals 3-Year Average EBITDA Margin and Days Cash on Hand (1)

Further, a strong cash position isn’t driven by COVID-19 funding, as the strongest Hospitals received fewer CARES Act dollars as a percentage of revenue, the H2C analysis found.

Exhibit 5.PNG

Independent Hospitals EBITDA Margin and CARES Act Funding as a Percentage of Revenue (1)

(1) H2C utilized a sample of 70 hospitals under $750 million in operating revenue, currently rated by Moody’s.

Note: Each plot represents a single hospital, with the size of the plot directly correlated to the amount of unrestricted cash as a percentage of total debt.

Source: Moody’s MFRA database.

Finally, higher-rated Independent Hospitals typically are better able to maintain their assets due to access to capital, the H2C analysis found.  As indicated below, higher-rated Independents benefit from lower plant age – 1-3 years more current, and ~60% higher DCOH.

Higher-rated Independents had
a median plant age of 12 years in
comparison to 15 years for lower-rated Independents

Higher-rated Independents had
a median DCOH of 324 in comparison to 203 for lower-rated

Exhibit 6.png

Comparison of Average Age of Plant and Days Cash on Hand

Source: Moody's MFRA database.

Assessing an Independent Hospital’s Position 

While health systems still hold advantages over independent hospitals—from geographic indispensability to negotiating leverage and economies of scale—the H2C analysis shows that strong Independents have built the financial strength to succeed. As leaders determine what is next for their hospitals in a post-COVID environment, they should ask themselves a key question: “How do we compare to the strongest independents—and what do we need to do to get or stay there?” 

Much of our analysis affirmed what industry leaders have preached for years: A hospital with dominant market share and a strong payer mix is likely to earn strong EBITDA margins, and solid EBITDA margins drive strong and growing balance sheets. However, market share and payer mix are often factors outside of a hospital’s control, and a more challenging market position can be overcome by other factors, such as favorable reimbursement, distinguished service lines, and community and/or government support 

As a best practice, leaders should evaluate their organization’s standing compared to these key attributes and ask key questions to evaluate sustainability, including: 

  • Where is my organization trending regarding market share and EBITDA? 

  • Is my organization competitive on a cost basis? 

  • How is my organization valued from quality and desirability perspectives? 

  • Does my organization have major capital projects on the horizon that will materially affect our financial profile? 

  • Is my geographic market growing and how can the boundaries of my primary service area expand? 

Succeeding as an independent in the current market environment is a challenge, but it can be done. Meeting the key attributes highlighted above will enable independent hospitals to produce sustainable EBITDA, strong liquidity, and the ability to reinvest in its core business to maintain reasonable asset life with low leverage. Whether your hospital is ahead or behind these key metrics, further assessing your strategy and position will help ensure your hospital's future success. 

H2C has worked with all types of hospitals, developing and executing strategies to drive success. As leaders evaluate their position,


H2C can be a resource. Contact us and let us know how we can help. 

About H2C Securities Inc.

H2C is a strategic advisory and investment banking firm committed to providing superior advice to public and private healthcare and higher education institutions and related organizations throughout the United States. H2C’s professionals have a long track record of success in mergers and acquisitions, capital markets, and real estate transactions, acting as lead advisors on hundreds of transactions representing billions of dollars in value.

Securities and services offered through H2C Securities Inc., member FINRA/SIPC, a registered broker-dealer and an indirect subsidiary of Fifth Third Bank, National Association. All rights reserved. Securities and services offered through H2C Securities Inc.: Are Not FDIC Insured; Offer No Bank Guarantee; May Lose Value; Are Not Insured by any Federal Government Agency; Are Not a Deposit.

For more information, visit

The Authors

Mike Tierney_Adjusted.jpg

Michael J. Tierney

Executive Director

William B. Hanlon.jpeg

William B. Hanlon III

Managing Director

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