Not-for-Profit Healthcare Outlook Remains Negative

The sputtering national economy, a rising federal deficit, and lean state budgets are getting blamed for debt downgrades in the not-for-profit healthcare sector which are expected to continue through the rest of the year and beyond, according to Moody's Investors Service.

"It is a negative outlook," says Lisa Goldstein, associate managing director at the bond rating agency. "We have had a negative outlook on this sector since November 2008, starting with the financial crisis. It speaks to continued pressure on hospitals financial performance for the next 12 to 18 months."

The federal deficit and strains on state budgets could result in reduced funding for Medicare and Medicaid, which could affect patient volumes and reimbursements, Goldstein says.  

In the second quarter of 2012, the $2.78 billion of downgraded debt of the US not-for-profit healthcare sector exceeded the dollar amount of upgraded debt, $2.11 billion, for a ratio of 1.32 to 1. Moody's said the finding contradicts eight of the past 13 quarters in which total upgraded debt exceeded downgraded debt. Many of the upgrades were for larger systems that carry more debt than smaller providers.

"It's too short of a time to call it a trend," Goldstein says of the second-quarter results. "There is a lot of volatility of the sector. We caution that it is just three months and three months today may look very different from the prior quarter." 

In fact, the Q2 results were skewed mainly because several larger not-for-profit providers had their ratings downgraded, including Kettering Health Network in Kettering, OH, and Fairview Health Services in Minneapolis, MN, according to the Moody's report, US Not-For-Profit Healthcare Quarterly Ratings: Downgraded Debt Trumps Upgraded Debt in Second Quarter 2012, Reversing Prior Trends.

Overall, there were 12 downgrades in the second quarter and nine upgrades for a ratio of 1.33 to 1, which Moody's reports is consistent with the negative conditions faced by the not-for-profit healthcare sector.
For the first half of 2012 there have been 23 downgrades affecting $4.2 billion in debt and 20 upgrades affecting $4.8 billion.

Of the downgraded providers in the second quarter of 2012, 56% had total operating revenue of $500 million or less while 56% of upgraded providers with operating revenues of $500 million or less. "This near equal split is a departure from the typical trend of smaller providers being more susceptible to downward ratings pressure due to multiple negative factors that put them at a disadvantage relative to their larger peers," Moody's said.

Goldstein says larger systems tend to be rated higher "because we see safety in numbers, strength in size, and critical mass."

"That being said we work with many small- to medium-sized hospitals that will demonstrate to us that because they are smaller they are very nimble and can make decisions more quickly and launch those strategies and execute on those strategies," Goldstein says.

"It is very much a broad statement to say larger equals better debt servicing. Although at the end of the day most of the large systems have higher ratings than the medium- and small-sized credits because they have gained efficiencies from their size of scale," she says.

"They usually have more leverage when dealing with third-party vendors and payers. One of the strengths we see in being large is they typically have a portfolio of hospitals and strong diversification of cash flow. Whereas if you are small and single site, if there is a tornado in that town you have no other facilities in the town to compensate if that particular facility is damaged."