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Credit Ratings in the Reform Era

Roxanna Guilford-Blake, November 15, 2010
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Nonprofit hospitals are adjusting their business models to meet the still-amorphous demands of reform, and ratings agencies are paying attention. Financially stable institutions that are nimble enough to adapt will be best prepared for whatever reform brings. "Generally, the feeling is that the stronger you are going into reform, the better off you will be," says Martin Arrick, managing director and the lead analyst for the U.S. nonprofit healthcare group at Standard & Poor's.

Arrick notes that there are two quite different aspects to reform. First, there's the financial side. The Centers for Medicare & Medicaid Services will cut millions in payments to hospitals in 2011—but more people will be eligible for coverage. "It's a volatile mix of who is going to win and lose," he says. "Everyone worries margins will be slimmer in the future. Cutting your expenditures now—becoming leaner—helps your financial profile immediately and builds for the future."

Todd Nelson, technical director in charge of senior financial executives for HFMA (and a former hospital CFO), offers a similar perspective, stressing that both cash management and treasury management pieces are essential.

Strategic alignment

Ratings agencies are very interested in physician alignment strategies, says Mark A. Bogen, CPA, vice president of finance at South Nassau Communities Hospital in Oceanside, NY. "Until they let CFOs admit and discharge patients, physician relationships are key to this success." South Nassau is moving toward greater physician alignment, while exploring which model or models would be best under reform.
Arrick calls hospital-physician alignment "perhaps the single biggest" reform-related strategy. While its genesis predates the reform legislation, it certainly dovetails with it. Moreover, the alignment that's been happening over the past five years is much smarter than the efforts of the '90s, Arrick says.

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