Healthcare credit ratings may look sturdy now, but the industry faces some turbulent times that undoubtedly will lead to ratings volatility, Moody's Investors Service said last week in its annual report on the not-for-profit healthcare industry.
"Don't be lulled into a false sense of security based on historical performance," warned Bruce Gordon, an assistant vice president in the New York-based rating agency's healthcare group. "The recent history, and probably the short term going forward, looks decent in terms of fundamentals and ratings, but we do see some fundamental shifts."
Healthcare buyers' rise in power, for example, means more providers are being forced to cut prices. Moody's says this will squeeze revenue growth into the next decade.
Reductions in Medicare and Medicaid rates will add pressure too, the report notes. The 474 hospitals rated by Moody's derive 55% of gross revenues from Medicare and Medicaid. But as governmental payers move recipients into managed care, those hospitals will see rates shrink by 5% to 10%.
Freestanding hospitals and single-state systems are particularly vulnerable, Moody's said. While their expenses continued growing-up 5% in fiscal 1996-the group's total revenue growth slowed to 4.9% last year from 6.1% in 1995.
The mid- to long-term outlook for multistate systems, on the other hand, is upbeat. Although expenses, which rose 7.2% in fiscal 1996, are increasing more rapidly than revenues-up 6.6% last year-multistate systems are better positioned to weather the storm, Gordon said.
The future Moody's envisions for many hospitals stands in stark contrast to the industry's current performance. Over the past 18 months as healthcare systems have merged, financial results and credit quality have improved. Upgrades of healthcare debt, for instance, are now outpacing downgrades by nearly 2-to-1.
In the first six months of this year, the agency lifted ratings on 16 healthcare issues worth $1.2 billion and lowered nine ratings, affecting $905 million of debt.
Moody's predicted "continued upward ratings momentum" in the near term, followed by a period of volatility that will particularly affect freestanding, unaligned hospitals in overbedded markets.
Ultimately, though, the surviving players should be well established once a better equilibrium between supply and demand is established, Gordon added.