Chicago-area hospitals, bracing for an increased pace of change in the local healthcare market, can expect volatile credit ratings and turbulent times ahead.
So says Standard & Poor's Corp., the New York-based credit rating agency, which unveiled a report on 28 of the area's tax-exempt hospitals and systems last week while opening its first office in Chicago.
"The evolution of Chicago's hospitals is moving very slowly and cautiously," said Joan Pickett, a director of the agency's municipal finance department in New York.
Managed-care penetration is about 20%, so Chicago hospitals have had the benefit of consolidating and networking more slowly than have hospitals in markets such as Minneapolis, Boston and San Francisco, where managed-care penetration runs as high as 50% or more.
"Other markets didn't have the luxury of going through the dating process," Ms. Pickett said. "They have to go right into the marriage."
Standard & Poor's analysis also cited the "political clout" of the American Hospital Association and the American Medical Association-both headquartered in Chicago-as factors in keeping managed-care forces at bay.
In addition, the agency said the state's budget problems, an out-of-control Medicaid program and the formation of purchasing cooperatives by businesses should force more collaboration among hospitals and other healthcare providers.
The Illinois Legislature has approved an "HMO-style" Medicaid program that would form networks of hospitals and providers, but the federal government has held up the program's waiver.
Standard & Poor's, which has seen similar problems with other state-initiated Medicaid reforms, expects Illinois to make appropriate changes. But with hospitals already owed more than $1 billion in unpaid Medicaid bills, the agency's analysts said local healthcare providers could be further harmed if a resolution is not quickly found.
"Not getting the waiver could cause a number of problems," said Joseph O'Keefe, a director with Standard & Poor's new Chicago office. "There could be payment delays, so the state needs to get its program approved fairly quickly."
In its report, Standard & Poor's called the Chicago market "highly fragmented," with 38 urban acute-care hospitals, 23 HMOs and more than half of the city's 17,500 physicians still practicing independently.
There isn't a front-running network emerging in the Chicago area, but Standard & Poor's said Oak Brook, Ill.-based EHS Health Care's $1.2 billion proposed merger with Lutheran General Health System of Park Ridge, Ill., would position the merged entity as "a leading contender for becoming the premier delivery system."
Meanwhile, two hub academic medical centers of major healthcare networks were given "negative" outlooks, although they still have high investment-grade ratings, analysts said.
Rush-Presbyterian-St. Luke's Medical Center, the anchor of the eight-hospital Rush System for Health, and Northwestern Memorial Hospital, the tertiary-care center for the seven-hospital Northwestern Healthcare Network, "have good ratings, but they are undergoing large construction projects that might strain their existing capacities," Standard & Poor's director Kenneth Rodgers said. "In the next one to three years they might be vulnerable to a downgrade."
The only investor-owned network in the market is Columbia/HCA Healthcare Corp., of Louisville, Ky., which owns six hospitals in the metro area. Although it hasn't made much of an impact in Chicago, it isn't to be underestimated, he said.
The credit rating analysts were unsure what kind of impact a new Cook County Hospital would have on the market. They said Cook County, the owner of the hospital, may have to raise taxes to pay for the $570 million hospital. But they said the hospital, which last week announced a teaching affiliation with Rush-Presbyterian-St. Luke's, is likely to maintain a role for inner-city care and indigent patients.
The Illinois Health Facilities Board completed hearings earlier this month on the need for a new Cook County Hospital. The panel is expected to decide the proposal's future next month. "One has to wonder if there is a need for another institution," Ms. Pickett said.