Small hospitals or systems, those with less than $500 million in operating revenue, will likely bear the greatest stress. Through the first nine months of the year, small hospitals accounted for three out of four downgrades in Moody's portfolio. Last quarter, four of the five downgrades were small hospital operators.
Notably, one upgrade last quarter followed the acquisition of Newton Memorial Hospital, a New Jersey hospital with roughly $129 million in operating revenue last year, by Atlantic Health System, Morristown, N.J.
Moody's analysts underscored their expectation that last quarter was a glitch rather than the start of a trend with a look at recent history. Unsurprisingly, downgrades surged during the final three months of 2008, as dislocated credit markets and plunging equities created havoc on hospital balance sheets. Credit-rating downgrades continued to be brisk for months until the first three months of 2010—the last time that upgrades exceeded downgrades. (See chart.)
Despite last quarter's flip to the up-versus-down ratio, Moody's analysts expect the year to close with more downgrades than upgrades. For the year to date, 23 hospitals or health systems have been downgraded compared with 18 upgrades. In the third quarter, hospitals that saw credit ratings lowered by the agency reported fewer patients, sluggish revenue, increased competition, greater leverage and worsening operations, Moody's said.
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