Recent deals will boost credit ratings for large statewide systems, but will squeeze smaller, independent hospitals.
When it comes to credit ratings, the wave of mergers and acquisitions of not-for-profit hospitals in New Jersey is creating two classes of hospitals in the eyes of Moody's Investors Service.
"Increased competition will remain a credit challenge for independent hospitals and smaller health systems as large systems within the state have formed, increasing in-state competitive pressures," Moody's Associate Analyst Jennifer Barr said.
"The ability to adjust quickly to change will be an important determinant of New Jersey hospitals' credit quality."
M&As have been taking place across the nation in the past few years, but New Jersey mergers play a more significant role in credit quality, given the statewide presence of multiple health systems, competition from neighboring states New York and Pennsylvania, and continued state fiscal pressures, Barr said.
In addition, providers from Philadelphia and New York City look to expand in New Jersey through out-of-state mergers and clinical affiliations.
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In April, for example, the merger of statewide systems RWJ Barnabas Health and Hackensack Meridian Health was credit-positive for these organizations because it brought them new size, scale and geographic coverage.
For smaller hospitals in the state, however, the merger brought intensifying market competition.
New Jersey hospitals will experience additional funding pressure in 2017 owing to a $200 million reduction in state subsidies for charity care, states the report, Not-for-Profit and Public Healthcare—New Jersey: Large-Scale Mergers are Credit Positive; Challenges Ahead for Small Independent Hospitals.
Reliance on these lower funds varies by hospital, with safety net hospitals most exposed. These include Trinitas Regional Medical Center in Elizabeth, St. Joseph's Healthcare System in Paterson, and Cooper Health Systems in Camden.
"Following Medicaid expansion in 2014, the state began reducing charity care subsidies as more state residents gained health insurance under expanded Medicaid eligibility criteria. However, the cuts have accelerated in recent years, exacerbated by the state's own fiscal concerns," Barr said.
New Jersey's safety net hospitals have benefitted from the Medicaid expansion with reductions in bad debt and unfunded care. This has resulted in improved operations and rating upgrades for Trinitas, St. Joseph's, and Cooper Health, she said.