RICHMOND, Va.-Hospitals in Virginia appear to be immune to national trends that have put a crimp in the financial performance of other providers, according to a recent report prepared by Moody's Investors Service.
The February report, Hospital Revenue Bonds: State of Virginia, is Moody's second analysis of ratings of unenhanced hospital revenue bonds-those without credit backing-in the state. The first report was released in January 1991.
In its new report, the New York-based rating agency confirmed 18 of its previous debt ratings for 20 hospitals in the state at A or higher. It lowered the rating of Potomac Hospital in Woodbridge to A from A1 and upgraded the debt rating of Richmond (Va.) Eye and Ear Hospital from Ba to Ba1.
Moody's considers hospitals in the Ba group and lower to be below investment grade.
Lisa Martin, an assistant vice president for Moody's, said Potomac's rating was lowered primarily as a result of an additional $22 million in debt the hospital took on in 1995.
"Their amount of debt is still below average, but that increase strains the hospital a little more," Martin said. "It doesn't allow the hospital as much operating flexibility."
William H. Flannagan, an executive vice president with Potomac, said the hospital issued the additional debt to pay for the construction of a new emergency room, some ambulatory facilities and other capital projects. He said he wasn't surprised at the rating change.
"We went from almost no debt to a $22 million issuance," he said.
Potomac's historically low debt level had been one of the main reasons for its high rating.
"With just 7,000 admissions last year, that size hospital would generally not have achieved as high a rating as A1," Martin said.
Moody's tied the upgrading of Richmond Eye and Ear to its receipt of a
$3 million donation in 1993.
"The donation enabled them to build up more cash reserves and maintain relatively low debt levels," Martin said.
However, Moody's didn't raise Richmond Eye and Ear all the way to investment grade because of a rapid move to outpatient care and other factors affecting specialty hospitals that have long relied on inpatient admissions.
"Richmond is managing costs under these circumstances, but its credit remains fundamentally weak," Martin said.
Jim Worrell, chief financial officer of Richmond Eye and Ear, said the upgrade shows that the ratings agency recognized the hospital has made a concerted effort to shift to outpatient care. He noted that the hospital's outpatient admissions have increased by 55% since 1991, while inpatient admissions have fallen by 35%.
"We're biting the bullet that others will have to bite soon," he said.
The A or higher ratings of the other 18 hospitals far surpass the national average for Moody's unenhanced bond ratings. Only 6% of the Virginia hospitals rated by Moody's have been below A, compared with 49% nationally (See graphic).
Moody's attributed the high ratings of the Virginia hospitals to a moderate regulatory climate and limited competition from managed-care organizations. The lack of interference has allowed most Virginia hospitals to run on high margins and low debt.
According to the report, Virginia hospitals with Moody's rated bonds had 1994 median operating margins of 3.9% and cash on hand for an average of 186 days. The 1995 national median operating margin was 3.3% with cash on hand for 108 days. And while the national median for debt-to-capitalization ratios is 44%, Virginia hospitals boast a median of 37%.
On the downside, the report warned that competition and consolidation are on the horizon for many Virginia providers, particularly in the overbedded Richmond area where 16 hospitals wrestle for admissions.
The growing presence of managed-care companies threatens to further jar the market, the report said. For example, the report noted, the 1993 joint venture between Riverside Health System and Blue Cross and Blue Shield of Virginia has positioned those providers to step on the toes of Sentara Health System. Sentara now controls 65% of the HMO market in the Norfolk-Newport News area.
In addition, some not-for-profits in the area have been considering joint ventures with Trigon, the managed-care subsidiary of the Virginia Blues.
"The hospitals' continued credit strength will depend on their ability to meet these challenges successfully," the report concluded.