Despite Merger Activity, Negative Credit Conditions Persist

Moody's, the giant credit rating agency, recently reported good news about upgrades in healthcare credit ratings for the quarter, and then proceeded to dump a bucket of cold water over everything.

Despite the fact that upgrades exceeded downgrades in the nonprofit hospital and health system sector by a ratio of 3.3-1 in the third quarter, Moody's says the high number of upgrades is the result of an increase in merger and acquisition activity. It is not due to a fundamental change in underlying negative credit conditions, the agency suggests.

That makes sense. One quarter does not portend a trend.

But broadly, mergers are supposed to drive efficiencies, and to some degree, efficiencies can have a big impact on margins. So how to gauge the state of the healthcare game as the chess pieces rearrange themselves as never before?

Lisa Martin, senior vice president in the Moody's Healthcare Group, says that regardless of the news about credit upgrades, "it just so happens that in this quarter, there were more positive rating actions than negative."

Overall, then, business still stinks?

"The drivers are some of the revenue pressures that hospitals are under," Martin says. "Revenue is tightening. Many are looking for ways to reduce costs to offset that and move from fee-for-service to more value-based reimbursement. They're improving costs and increasing quality and in order to do that, you need scale."

Yes, we know all that.

At what point will the math start to work again?

Martin won't say. She just knows that the environment is so challenging for the foreseeable future that some hospitals—even some systems—will be paying higher premiums on their debt because of the perceived risk of the business. It boils down to how successful these mergers are on the whole, and nobody has a good read on that, she says.

"To the extent that these M&As reduce costs, that can be a positive," says Martin. "The potential downside is that after the initial consummation, the hospitals and health systems become distracted by integration and are unable to achieve those benefits. There are also issues with volumes and physician loyalty."

Again, this is nothing you, as a leader in your hospital or health system, aren't already acutely aware of.

So let's not get carried away with this report. Yes, the environment is challenging. It's difficult to achieve the margins that will be needed to ensure the long-term viability of your hospital or health system.

But Moody's ratings are a tool for bond buyers to evaluate you—nothing else. While you can't do anything about the predicted earnings malaise facing healthcare in general in coming years, you can do something about your specific situation.

Some of these headline-grabbing mergers will be successful. Some will fall apart. Healthcare doesn't exactly have a stellar track record of combinations. That's where you and your colleagues can separate yourselves from the pack.

On the margin, healthcare might be a worse bet than it used to be for bond buyers. You'll have to pay slightly higher interest rates because of that perception. But beyond that, it's up to what you do.

What's your strategy for succeeding long-term? Are you beefing up your outpatient book of business? Are you hiring your docs? Are you meeting or exceeding quality targets? Are you coordinating and documenting care appropriately?

Those all depend on you and your team's execution, and that can be a comforting thought in a sector that is undergoing such dramatic upheaval.

In the end, a report about hospitals' creditworthiness is just a piece of information. And your creditworthiness may not even be as big an issue now as it has been traditionally.

Times are tough, but you can still control your destiny. Even if you don't rate highly on the bond market, private equity and other forms of obtaining investment capital are on the rise.

If nothing else, that investment interest from nontraditional sources suggests that amid all the doom and gloom about declining reimbursements as far as the eye can see, there's hope.

At least someone thinks margins won't be crunched forever.