Children's hospitals will maintain better-than-average credit ratings at least for a few more years, but they'll need to form partnerships with larger providers for long-term stability, according to a new analysis by Moody's Investors Service.
"They are moving toward containing costs, but that in and of itself is not enough," said Lilly Bursztajn-Scher, a senior analyst at the New York-based credit-rating agency. Children's hospitals have to ensure that they aren't "carved out" of local delivery systems, she said.
Bursztajn-Scher predicted market competition, consolidation and managed care will force children's hospitals into new partnerships with the adult healthcare system.
"We're already seeing that occurring in a few markets," added Lisa Martin, Moody's assistant vice president.
Their analysis, published in the March 8 issue of Moody's Credit Perspectives, outlines two partnership approaches. One is the 1995 affiliation of St. Louis Children's Hospital with BJC Health System in St. Louis.
"That's going to give them access to managed-care contracts that they wouldn't have had," Bursztajn-Scher said.
Another is the model pursued by Minneapolis Children's Medical Center and Children's Hospital in St. Paul, Minn., which formed Children's Health Care in a 1994 merger. Instead of aligning with a single provider, the merged organization is seeking to contract to become the "provider of choice" for all the region's hospital networks, she said.
Other children's hospitals may replicate one of these models or create a new one. "It really does depend on the market dynamics," Bursztajn-Scher added.
According to the analysis, children's hospitals have benefited from their market niche, healthy cash positions and ability to tap charitable donations. They've also dominated their niche, with just 7% of all hospitals accounting for more than 40% of the nation's pediatric beds. And their median credit rating of A1 exceeds a median of A for all healthcare credits rated by Moody's.
"Clearly, they play into the hearts and hands and souls of many people," Bursztajn-Scher said.
But higher costs related to teaching, research and patient care will become harder to offset as Medicaid and managed-care contracts reduce reimbursement, the analysis stated.
So far, management has successfully lobbied to preserve disproportionate-share payments for treatment of the poor, but future reimbursement changes could affect some children's hospitals' credit quality, it said.