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Pulling Ahead

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In Lake Wobegon, all of the children are better than average.Nonprofit hospitals seem to be following the philosophy of that fictional Minnesota town, according to a new report from Moody's Investors Service that shows nonprofit hospitals have a substantial credit rating edge over their for-profit brethren. That's nothing new, says Lisa Goldstein, a senior vice president of healthcare ratings at Moody's and the author of the report. Because of a variety of factors, including the aggressive use of debt by for-profits to facilitate growth, for-profits as a group have always had lower ratings than nonprofits. But the gap has widened dramatically over the past year, Goldstein says. "There's always been that dichotomy, but what we've observed is that the performance of nonprofits is the strongest it's been in a long time," she says. Thanks to nonprofits' focus over the past few years on core operations, "they really have pulled out of the station financially as a whole," Goldstein says. "It's reflected in the ratings."The upshot, the report notes, is that for-profit hospital chains are less of a threat than they've ever been to the market share nonprofits currently hold. Moody's rates entities representing about 470 for-profit hospitals and 1,200 nonprofit hospitals. In fact, in terms of strategy, nonprofits may even have an edge, Goldstein says. "There's been kind of a flip-flop." In the past, observers could count on the for-profits to lead innovation, be first and best to the table on acquisitions, and sharp on execution of growth strategy, Goldstein says. For-profits are still good at that, she notes, but with valuations for acquisitions at historic highs, they've retrenched into focusing internally. "They're getting their house in order and integrating with physicians," she says. "These are things the nonprofits have been doing for years, and recent results show it was the right strategy." -Philip Betbeze