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Moody's: Leadership a Top Factor in Hospital Ratings

Jeff Elliott, for HealthLeaders Media, November 16, 2010

"There are organizations that have struggled even though they have a very good management or governance team in place," she said. "It may simply be because of the function of the region they operate in, such as a high number of Medicaid patients."

Governance isn't the only factor contributing to ratings decisions. Organizations that are able to consistently grow operating cash flow as well as show stability in cash balances and liquidity are also prime candidates for upgrades, according to Patel.

In addition to management effectiveness and operating performance, Moody's bases its ratings decisions on the strength and liquidity of a hospital's investment portfolios, its management of debt structure, demographics and market share and organizational or legal structure changes.

Downgrades are most influenced by sudden or prolonged weakness in financial performance, which may be due to sizeable volume declines or flat/negative revenue growth; material decline in unrestricted cash and investments, as well as a lack of liquidity; risks to their debt structure; a sizeable increase in debt load; and material operating changes or event risks such as litigation claims beyond insurance coverage or worker strikes.

Overall, the last few years have been hard on nonprofit hospitals' credit ratings. Since the fourth quarter of 2007, Moody's has downgraded 155 hospitals compared with 92 upgrades. "Some hospitals and health systems have been able to absorb operating challenges, execute change and are strategically and financially better positioned for future changes, while others have struggled to develop a strategy toward longer-term viability," Patel noted.

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