With downgrades of tax-exempt healthcare credits outpacing upgrades by a 1.7-to-1 margin in 1995, Moody's Investors Service is predicting another year dominated by negative ratings changes.
Last year, the New York-based credit-rating agency lowered 43 ratings representing $1.5 billion of debt and raised 25 ratings on $1.2 billion of debt. Moody's said the proportion of downgrades to upgrades reflects a long-term pattern of deterioration of healthcare credits. In 1994, for example, the agency slashed 34 ratings on $2.1 billion of debt and elevated 21 ratings on $1.1 billion of debt.
Earlier this month, Standard & Poor's Corp., a competing credit-rating agency, reported more upgrades than downgrades of municipal healthcare credits (Feb. 5, p. 20). The discrepancy with Moody's report may be attributed to ratings of different credits in different markets.
Still, both agencies agree that industry consolidation and managed-care pressures will result in more downgrades of healthcare credits.
"We are expecting, because of continued pressure, that downgrades will exceed upgrades in the future," said Diana Lee, senior credit officer in Moody's healthcare finance ratings group.
As providers respond to market pressures, they often will deploy strategies that can involve additional credit risk, such as physician acquisitions, Lee observed. "The key, I think, is the management and the implementation of the strategies," she said.
Half the healthcare credits lowered by Moody's last year affected hospitals in California, New York and Pennsylvania. The downgrades generally reflect increasing volume and revenue pressures.
Upgraded institutions included Franciscan Sisters of the Poor Health System in Brooklyn, N.Y.; Ancilla Systems, Hobart, Ind.; and Holy Cross Health System Corp., South Bend, Ind. "All three have benefited from their large size, diversity, and efforts by management to cut expenses and develop new strategies," Moody's said.
Some hospitals in Maryland, Michigan and New Jersey also benefited from a boost in ratings. Maryland's stable regulatory environment, Michigan's improved economy and the improved financial condition of New Jersey hospitals contributed to the upgrades.
In 1996, Moody's believes proposed state and federal reductions in the growth of Medicare and Medicaid spending will have a major impact on the hospital industry, especially on academic medical centers and inner-city hospitals. These hospitals "are attempting to be proactive in cutting costs, knowing that they're going to have additional pressures from governmental payers," Lee said.
On a brighter note, Moody's confirmed 377 ratings, which shows that "many hospitals were able to keep pace with the revenue pressure," Lee said.