After downgrading much of the not-for-profit hospital industry during the past two years, two leading credit-rating agencies said the carnage might be winding down. But they haven't put away the ax.
Last week, Moody's Investors Service predicted that not-for-profit hospital credit ratings will stabilize by the end of the year. Its announcement followed a report with similar conclusions issued by competitor Standard & Poor's earlier this month.
Both agencies, which rate a total of about 1,000 hospital credits, said they still expect downgrades to exceed upgrades this year, but at a smaller ratio than in the past.
"We expect that the number of upgrades and downgrades will equalize toward the end of the year," said Bruce Gordon, a senior vice president at Moody's.
In another positive sign, Moody's last week changed its outlook for the for-profit hospital sector to stable from negative. It said the credit quality of for-profits has benefited from a more stable Medicare environment, growth in same-facility admissions and organizations' ability to leverage market share to win better managed-care contracts.
In the not-for-profit sector, downgrades have outpaced upgrades by about 5-to-1 in the past 24 months as rating agencies have reacted to financial pressures on the industry from the impact of the Balanced Budget Act of 1997, managed care and failed business ventures. Last year, 137 hospital credits, roughly one in 10 with rated debt, saw their ratings sink, compared with just 25 upgrades.
The for-profit sector also faces credit concerns including rising labor costs and the threat of less-favorable managed-care rates, Moody's said. To meet earnings targets, companies may turn to debt-financed acquisitions or stock buybacks, the firm said.
The 11 for-profit hospital companies Moody's rates had an overall annualized profit margin of 13.1% in the first nine months of 2000.