In rating hospital mergers and acquisitions, Moody's Investors Service said it balances three key credit factors: governance and management; market position and financial status.
Most organizations will benefit from consolidation in the long run, Moody's said. But those benefits can be offset by short-term organizational problems, excess capacity and negative financial impact, adversely affecting a hospital's rating, it said.
"The most difficult component of mergers and acquisitions is the balance the board and management must strike between accomplishing their ultimate goal and not upsetting ongoing relations," Moody's said. "Their effectiveness is critical during a merger's early stages and affects all aspects of the consolidation."
The New York-based credit-rating agency described its approach to rating hospital mergers and acquisitions in a special report published last month.
While a merger can result in a hospital's upgrade by improving its competitive position, the addition of excess beds and assumption of significant debt can offset that benefit, the report said.
When looking at a merger's financial impact, Moody's looks at the types of clinical and administrative consolidations that will occur, the estimated cost savings to be achieved and initial capital needs. It also asks how the combined organization will perform financially during the early stages of the merger and whether the hospitals have information systems in place to monitor costs.
Moody's report gives examples of actual mergers and acquisitions to explain its ratings approach.