If not-for-profit hospitals and healthcare systems needed a theme song, the Timbuk3 tune "The Future's So Bright I Gotta Wear Shades" wouldn't be it.
New York-based credit-rating agency Moody's Investors Service forecasts a gloomy next few years for not-for-profit providers.
One of the reasons for this less-than-rosy outlook is revenue pressure created by the Balanced Budget Act of 1997.
But a report from Moody's addresses other issues, too, including how mergers and acquisitions affect bond ratings.
"The corresponding uncertainty that arises when providers grapple with the transition to larger healthcare delivery systems is an increasingly common factor that contributed to numerous (rating) downgrades in 1998 and may contribute to more uncertainty in the future," according to Moody's.
Moody's recently released the outlook for the not-for-profit healthcare sector in an annual report.
Moody's rates almost 500 not-for-profit hospitals and healthcare systems with overall outstanding debt of more than $60 billion.
One of the systems hit with a ratings downgrade because of its acquisitions was Alexian Brothers Health System, Elk Grove Village, Ill. The system bought two suburban Chicago hospitals late last year from Columbia/HCA Healthcare Corp., Nashville.
The Moody's report says the agency revised outlooks or downgraded ratings for Alexian, along with some other systems that purchased Columbia hospitals, because of the increased debt they incurred "as a result of purchasing these facilities at prices higher than what historical market values would justify."
Alexian Brothers paid $254 million for two Columbia hospitals in a three-way hospital deal in which the system sold 192-bed Alexian Brothers Hospital, San Jose, Calif., to Columbia for $60 million (Aug. 2, p. 44).
Alexian Brothers now has three hospitals, all in suburban Chicago.
Pamela Federbusch, a senior vice president at Moody's and the author of the report, explained why mergers and acquisitions affected ratings.
"Providers encountered a lot more integration problems than they originally anticipated, and it has taken longer to take costs out of the system and culturally for everyone to be on the same page," she says.
Because not-for-profit providers don't have the access to capital markets that their for-profit counterparts do, a ratings downgrade can be trouble, says Sheryl Skolnick, managing director of healthcare services at BancBoston Robertson Stephens in New York.
A lower bond rating means debt is more expensive and issuing the bonds can become more difficult.
The Moody's report says that as the size and complexity of these mergers increase, so do mega-systems' needs for capital and future debt issuances.
While Moody's believes most mergers and acquisitions ultimately produce good results, such as economies of scale and operating efficiencies, some systems fumble when they try to make their disparate parts work together.
Pittsburgh-based Allegheny Health, Education and Research Foundation is a prime example, according to Moody's.
AHERF couldn't integrate its money-losing hospital operations in Philadelphia and its hospitals in Pittsburgh "into a cohesive organization," the report says.
AHERF filed for bankruptcy last year (July 27, 1998, p. 2).
The Moody's report says post-merger rating downgrades happen primarily because management doesn't reduce costs or fails to properly assess the added business lines. Also, there are usually problems with integrating information systems and collecting receivables.
Combining operations can be tough, but merging workforces is another big challenge.
"When you combine organizations . . . you still have people differences: We do things one way; you do things another way; and my way is better," Skolnick says.
All this merger activity has caused some not-for-profit providers to rethink ancillary businesses that aren't profitable or aren't performing.
Many hospitals and health systems decide to sell physician practices and HMOs first, a process that has come to be known as "dis-integration."
Dis-integration gave a boost to 330-bed Touro Infirmary in New Orleans. Moody's upgraded Touro to Baa1 from Baa2, partly because it dumped its partial ownership in a money-losing HMO, Advantage Health Plan (Feb. 22, p. 2).
"The theme for 1999 is to refocus on core operations, unique service lines or centers of clinical excellence," Moody's says.