In the business of healthcare, it's hard to escape the reality of reduced profitability as far as the eye can see. That dour outlook is being reflected in the bonds of nonprofit healthcare organizations. If you owe money to an individual or institution, they like to keep a close eye on the general health of the business, in addition to the individual market in which you operate.
And based on their calculations, all is not well.
A report this week from Moody's Investors Service revealed that 2012 was a record year in terms of the amount of hospital and health system debt downgraded. At $20 billion of nonprofit healthcare debt downgraded, 2012 represents the highest amount of downgraded debt since Moody's started tracking the metric in 1995, and is more than double the amount of upgraded debt (which is reflected in improving business trends).
Granted "since 1995," is not a long history. Also, the report is loaded with caveats. Three large systems accounted for more than half the downgraded debt, so the record amount of downgraded debt is, by itself, not necessarily a harbinger of hard times.
Indeed, many hospitals and health systems that saw upgrades on their debt were able to realize a stronger financial position through expense management strategies and balance sheet improvement, showing that those strategies may still have some room to run.
Yet Moody's expects similarly bleak results in terms of upgrades vs. downgrades in 2013. Clearly, this trend is not your friend.
It's difficult to make correlations between individual systems and the macro environment. Your hospital or health system may be doing well. You know all the stuff going on at your organizations better than analysts at Moody's do, after all, and if you're comfortable, maybe this news is concerning to a degree, but it's not going to change your long-term strategy.
So why does it matter?
To make a deeply flawed, but helpful analogy, your state may be running a budget surplus, but that doesn't mean that unsustainable federal deficits won't have a detrimental effect on you, eventually. Similarly, the view that healthcare is at best a low-growth business is reinforced when downgrades outpace upgrades.
There are positives. Low interest rates have allowed many to refinance and even take on additional debt to fund the deep structural changes that are needed to transform business and clinical practices away from the current fee-for-service reimbursement environment.
Low interest rates coupled with expense reduction and waste elimination strategies have also allowed the bold to chase acquisition and fund outpatient growth strategies that may have previously been cost-prohibitive. But expense reduction and balance sheet improvement have their limits, and interest rates won't always be this low, say analysts from Moody's.
"With expected flat revenue growth and many low-hanging expenses already removed from operating structures, management teams and hospital boards will seek deep process changes to reshape their model of healthcare delivery and create greater efficiencies," the report argues.
If you're delaying this type of deep systematic change for any reason, you won't be able to hide much longer.
Because time appears to be growing short for those who have failed to articulate a strategy of how to survive independently in a much more complicated financial milieu for hospitals and health systems, and because some of the reasons for upgrades noted above have a limited degree of sustainability, you should be aware and be ready to adjust your strategy quickly.
The time for watchful waiting on strategy appears to be over.
Philip Betbeze is the senior leadership editor at HealthLeaders.