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Record number of debt downgrades for not-for-profits in 2012: Moody's


By Beth Kutscher
Posted: February 12, 2013 - 3:15 pm ET
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Moody's Investors Service downgraded a record amount of debt (PDF) held by not-for-profit healthcare providers last year as concerns mounted about weakening inpatient volume and reimbursement.

The downgrades on the not-for-profit side contrast with more optimism seen among publicly-traded hospital operators, which have recorded significant gains in their share prices over the past 13 months.

Yet Moody's noted that it downgraded $20 billion in not-for-profit healthcare debt in 2012, more than twice in the previous year, when it downgraded $6.4 billion.

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The credit-ratings agency cited not only a challenging operating environment, but also increasing debt loads, declining liquidity, heightened competition and “management and governance issues.” Many hospitals are facing increasing pension burdens, Moody's said.

Yet as systems keep getting bigger, most of the downgraded debt ($13 billion) was held by just three providers: Catholic Health Initiatives, Englewood, Colo.; Dignity Health, San Francisco; and Memorial Sloan-Kettering Cancer Center, New York.

"Those systems are very highly rated," said Lisa Goldstein, associate managing director at Moody's. "We see a lot of safety in mass, in critical size. … To us, it basically means that no system is immune despite its size."

At the same time, last year was a volatile one, and Moody’s also upgraded more provider ratings than it did in 2011 as hospitals joined forces through consolidation, slashed expenses and refinanced debt thanks to historically-low interest rates.

Yet Moody’s overall took a somber tone on the sector.

Goldstein also noted that it said the ratings agency expects downgrades to outpace upgrades even into 2014, despite the addition of more insured patients, because of the overall volatility of the industry. "For the past 20 years, we've only had four years when we've had more upgrades than downgrades," she said.

Medicare will be under particular pressure as policymakers look for spending cuts to reduce the federal deficit, and payments from Medicaid could also be pinched as some states opt out of expanding their Medicaid programs, Moody's said in the report, noting that commercial payers represent less than 10% of the payer mix at some not-for-profit hospitals.

One potential upside for not-for-profit providers could come from continued mergers and acquisitions activity, which was already at a fever pitch for 2012, Moody's said.


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