Losing big money on physician practices won't affect a hospital's credit rating, as long it looks like there's a long-term payoff.
That's the word from Standard & Poor's and Moody's Investors Service, the two largest companies in the business of rating corporate debt. The interest rate and market interest in corporate bonds is influenced by the credit worthiness rating granted to a company by Standard & Poor's and Moody's.
In the Aug. 11 edition of Standard & Poor's CreditWeek Municipal, the rating
service says it can believe integrated health systems' arguments that a money-losing physician component has benefits that may not be immediately apparent in the bottom line, like referrals to a hospital or ancillary service.
"Since this is extremely subjective, Standard & Poor's judges physician subsidiaries on their own merits, while simultaneously looking at the larger organization's financial performance," wrote healthcare analysts Cynthia Keller, Terry Goode and Martin Arrick.
Sometimes ratings are even raised despite losses, the analysts wrote. In June, Partners Healthcare System in Boston had its rating raised to AA-minus from A-plus despite a drop in income because of a $25 million expense for network and physician development. The analysts wrote that the expense was necessary to bolster the PHS primary-care physician base, so it was viewed as a positive long-term move.
However, hospitals claiming that acquiring physicians will increase their overall bottom line at some point must prove that to Standard & Poor's or face a downgrade, analyst Goode says. Standard & Poor's sets no deadlines, but does hope to see continuous financial improvement, he says.
Moody's vice president and senior analyst Lisa Martin says her ratings service also will cut hospitals some slack for physician acquisitions.
"More often than not, the support to the physicians outweigh the benefits financially, so overall we have seen a significant drain on hospitals' operating performance," Martin says. "That has not necessarily led to a bond rating change. The change in a rating is due to more than one factor. There are only a handful of cases where the primary reason (for lowering a bond rating) was because of the support of the physicians."
Martin says it's more likely a small- or medium-sized hospital system will have its debt downgraded for physician practice losses. That's because they are less financially able to absorb the hit, she says.
Moody's rates debt for 380 hospital systems nationwide, Martin says. Standard & Poor's did not release the number of hospital systems whose credit it rates.