Not-for-profit hospital credit ratings continued to fall by nearly a 3-to-1 ratio in 2003 as operational improvement was trumped by greater debt, slackening demand and rising expenses.
Overall, downgrades outpaced upgrades for the fifth straight year.
"2003 was more negative than expected," said Pamela Federbusch, a senior vice president at Moody's Investors Service, which a year ago predicted incorrectly that 2003 would bring a third consecutive decline in the number of downgrades. Instead, downgrades by the three rating companies grew 41.5%, to 133 from 94 the year before.
Federbusch cited surprise factors such as softening patient demand for services that began early in the year and higher-than-expected expenses to fund pension plans and malpractice insurance. In addition, many hospitals took advantage of continued low interest rates to issue additional debt, driving new financing to its highest recorded level last year (Jan. 12, p. 8).
"More debt being issued contributed to pressure on the balance sheet," Federbusch said.
For example, Montrose (Colo.) Memorial Hospital and OhioHealth were poised for upgrades that were forestalled when they took on new debt, said Martin Arrick, managing director of Standard & Poor's.
Yet at the same time, more hospitals grew stronger. Upgrades grew 29% last year, to 49 from 38. Among the upgrades were 19-hospital Adventist Health System Sunbelt Health Care Corp., Winter Park, Fla., and nine-hospital Memorial Hermann Healthcare System, Houston, with nearly $2 billion in outstanding debt.
Standard & Poor's has about equal numbers of positive and negative outlooks on hospital credits, versus a majority of negative outlooks a year ago. In the past few years, many hospitals and systems have improved their operating margins by reducing costs for staffing, improving collections and boosting charges to private payers.
"It's really a good credit story. We definitely have been seeing operational improvements," Arrick said. "The surprise, if there was one, is that organizations that are doing well seem to be thriving."
The increases in both downgrades and upgrades reflect not only a growing gap in credit quality in the industry that began in the late 1990s but also more ratings reviews. The total number of rating changes increased 37.9%, to 182 from 132, from the previous year.
The two largest companies, Standard & Poor's and Moody's, hired more not-for-profit healthcare analysts last year, citing greater industry volatility.
"We've really ramped up our surveillance," Arrick said. Standard & Poor's reviewed 420 credits in 2003 compared with 290 the previous year, he said.
Similarly, Federbusch said Moody's reviewed more than 80% of its portfolio of nearly 400 healthcare credits.
Analysts expect the ratio of downgrades to upgrades to remain about the same in 2004, as smaller reimbursement increases from commercial payers, more bad debt, higher technology and consulting expense, and Medicaid cuts overcome positive factors such as higher Medicare rates and reduced physician competition. "Negative factors prevail," Federbusch said.