Moody's: Leadership a Top Factor in Hospital Ratings

The quality and capability of leadership—including a hospital's board and management team—are primary aspects when determining not-for-profit hospital ratings, according to Moody's Investor Service.

"Management and governance is a core element that affects both ratings upgrades and downgrades," says Moody's Analyst Deepa Patel. "Without strong leadership, hospitals can easily suffer from inaction, late actions, or strategic missteps that lead to rating downgrades or even payment defaults."

A common characteristic of strong management teams has been their ability to effectively maintain cost structure and meet budgets, even in the face of financial adversity such as the recent downturn and subsequent credit crisis, according to Patel. "Now more than ever, these challenges require realistic and farsighted strategies that are ultimately determined by senior management and a hospital board of trustees."

Patel and her team have noticed some proactive strategies that top-performing organizations have employed such as scenario planning and cost reductions. For instance, an organization that operates in a region with high unemployment might project a situation in which the market was to tighten even further and determine in advance some cost-saving actions it would implement to deal with the situation.

Another effective strategy Moody's has witnessed is the creation of a balance sheet recovery plan. One organization came up with targets for critical financial metrics such as days cash on hand and liquidity and projected its operating cash flow levels required to meet its goals.

The flipside was true of underperforming hospitals. "We've seen other organizations that haven't taken a very strategic approach, which is reflected in their weak performance and could lead to a downgrade," according to Patel, who was quick to note that exceptions do exist.