Already feeling some pressure from mounting public scrutiny of billing practices and tax exemptions, not-for-profit hospital and health-system board members may also be asked to play a bigger role in the bond-rating process, according to a new report from bond-rating agency Moody's Investors Service.
With healthcare growing increasingly complex and governance continuing to be "a critical issue," Moody's may turn to board members for additional assistance in evaluating credit-worthiness, according to the report, called Governance of Not-for-Profit Healthcare Organizations. When this may happen depends on how quickly the industry and governance practices evolve.
Moody's analysts already make it a goal to visit with hospital board members but may expand that to some sort of requirement. "We do meet with board members, but it's not routine. Not everyone does it," said the author of the report, Diane Viacava, a vice president and senior credit officer at Moody's.
The idea behind increasing board member participation is that Moody's would gain more insight into an issuer, while board members might learn more about the rating process, Viacava said. "I'm not sure if (board members) fully understand the rating process," she said.
The report's goal was to shed more light on how Moody's incorporates governance into its ratings. Modern Healthcare first disclosed Moody's interest in governance as a credit criteria nearly 18 months ago (Dec. 1, 2003, p. 12).
Ratings agencies are focusing more on governance, said hospital governance consultant Dennis Pointer. Viacava said the issue already was important at Moody's, though the increased attention has invited more questions from issuers and investors. Pointer suggested governance should play a bigger role in ratings decisions because, in general, hospital board members need to improve the quality of their governance.
The Moody's report describes governance as an important yet tough-to-pin-down issue that is key to a hospital's success or failure. Because hospitals often tap local community leaders as unpaid overseers, finding members with appropriate expertise can be tough.
Governance can affect a rating from Moody's. "It can be a driving factor of a rating, especially one that's on the cusp," Viacava said. In addition, the different aspects of governance often are interrelated.
Moody's breaks governance down into seven core dimensions for rating a hospital or system, one of which is avoidance of conflicts of interest. The other aspects of governance cited by Moody's in the report are: development of an organization's mission; selection and evaluation of senior management; composition of the board and its performance; interpretation and understanding of financial reporting; use of performance metrics based on external benchmarks to review performance; and building and maintenance of financial resources.