S&P expects ratings to dip for not-for-profits

Not-for-profit hospitals on the whole will see a slight dip in credit ratings this year before ratings stabilize, according to Standard & Poor's annual outlook (PDF) for the sector.

The rating service blames financial pressures—such as potential cuts to Medicaid and Medicare funding and reduced insurance coverage because of relatively high unemployment—for the projected decline in ratings.

S&P officials lauded hospital administrators for their efforts in controlling costs, and Managing Director Martin Arrick said in a Thursday conference call that the firm believes managers will continue to hold expenses down in the near future. But cutting future costs will pose a challenge, as most of the “easier” cost-cutting tactics have already been used.

“At some point, providers will have a harder time in cutting costs in the traditional way, and we are going to have to look toward changing how they provide care,” Arrick said.

S&P noted that some economic indicators—days' cash on hand, debt service coverage and EBIDA margin—had rebounded from 2008, when the recession began. This is cause for being “guardedly optimistic that ratings trends will be relatively stable for the next year,' said S&P Director Liz Sweeney.

Sweeney pointed toward federal meaningful-use dollars as a plus for revenue. Those funds are used incentivize the adoption and meaningful use of electronic health-records systems. In 2012, the CMS made meaningful-use payments to 231,166 Medicare-eligible professionals and 4,193 hospitals. That's an 87% increase compared with 2011's 123,921 professionals, and a 36% increase for hospitals. Professionals include physicians, dentists, optometrists, podiatrists and chiropractors. Many times, providers had already planned installing electronic medical records systems, so receiving federal money was a bonus, Sweeney said.

“A lot of them have really accelerated to make sure they can qualify for meaningful-use and take advantage of their dollars,” Sweeney said.

S&P's report comes a week after the American Hospital Association released data showing U.S. community hospitals posted a 3.3% rise in net revenue, one of the smallest increases in years.

S&P officials also said the ramifications felt by the initial implementation of the individual insurance mandate won't be felt until one or two years, and long-term impact won't by felt until 2016 or 2017.

“We believe that many hospitals and health systems will manage under reform effectively, but even the strongest hospitals are, at best, only likely to hold existing margin and liquidity levels, while weaker providers will likely see ongoing margin and balance sheet pressure leading to rating deterioration,” the report read.