Skip to main content

Bond Ratings Pressure Smaller Hospitals as NFP Sector Falters

 |  By John Commins  
   May 01, 2013

When it comes to bond ratings, bigger is still better for not-for-profit hospitals.

Five of six not-for-profit hospitals that saw their bond rating downgraded by Moody's Investor Service in the first quarter of 2013 were smaller providers with less than $500 million in revenues, the ratings analysts said in a new report.

Lisa Goldstein, associate managing director at Moody's, concedes that the report is not breaking news.

"We have said for a while that small hospitals, as we look at them through the lens of a rating, are more vulnerable and susceptible to the changes in the industry which heretofore would go at a glacial pace. Now things are picking up," she says.

Fueling that acceleration, Goldstein says, is the looming implementation of key provisions and reimbursement models in the Affordable Care Act that take effect on Jan. 1, 2014.

"It's interesting to us that in the first quarter, five of the six downgrades were of small providers and two of the three upgrades were of more sizeable providers. The numbers are different from the first quarter of 2012 but the message is not new," Goldstein says.

During the first quarter of 2013, Moody's reported that it affirmed 55 ratings, representing 86% of all rating activity and affecting approximately $25.3 billion in debt. Moody's expects more downgrades than upgrades in the second quarter of 2013, as there are already three hospitals under review for downgrade.

Smaller healthcare providers are at a disadvantage when compared with larger hospitals and systems, Goldstein says, because of their limited leverage with payers and vendors, lack of economies of scale, and over-reliance on a few key physicians.

That is not to suggest that larger not-for-profit hospitals and health systems are skating along. Moody's outlook for the entire sector is negative.

"We would say that over the next one to two years things are going to be challenging for everyone, for hospitals of all sizes," Goldstein says. "It is not that we have 'X' outlook for the big systems and 'Y' outlook for the small guys. It's negative for the whole industry. Things will get tougher. Things already got tougher April 1 with sequestration. That wasn't a change in how healthcare is delivered. That was just a top-line 2% cut. With or without sequestration things will be tougher over the next couple of years. We are in a big transformational period right now."

Moody's rates about 470 distinct borrowers, ranging from individual hospitals to health systems with dozens of hospitals. Goldstein estimates that Moody's ratings "touch about 1,200 hospitals."

In the first quarter, Moody's downgraded $988 million in not-for-profit healthcare debt and upgraded $658.1 million, for a ratio of 1.5 to 1. The ratio for downgraded issuers versus upgraded issuers during the quarter was 2 to 1 ratio—the same ratio as in the fourth quarter of 2012, when there were 10 downgrades and five upgrades. The nine rating changes in the first quarter of 2013 were a decline from the 22 rating changes during the first quarter of 2012, when there was an even split between downgrades and upgrades, Moody's announced.

Goldstein predicts the ongoing rush towards mergers and acquisitions and other provider consolidations will accelerate in the coming months and years.

While there was some softness in M&A activity overall in the first quarter of 2013, according to a report from research firm Irving Levin Associates, Goldstein is seeing an upswing.

"The climate we are in for consolidation is pretty heavy and it seems like once a week there is an announcement about somebody talking about somebody," she says. "We are in the second wave of heavy M&A activity. The first wave was about 12-13 years ago. Now it is back. A lot of this is driven by reimbursement top-line revenue pressures. People say we are going to be better if we are part of a bigger system, or we are big but we need to be bigger for scale. We are in it as we speak, this rapidly accelerating M&A period."

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

Tagged Under:


Get the latest on healthcare leadership in your inbox.