Risk sinks U.S. hospital credit ratings

The outlook for not-for-profit hospital credit ratings remains poor for the foreseeable future, according to an executive with Moody’s Investor’s Service who spoke this week at the 2013 HFMA National Institute.

Lisa Goldstein, associate managing director with the Not-For-Profit Healthcare team at Moody’s, told conference attendees that, of the 466 not-for-profit hospitals and healthcare systems rated – approximately 1,200 total hospitals in all – none achieved the coveted Aaa rating, and only one – Utah’s Intermountain Healthcare – was rated Aa1.

“There has never been a Aaa rating of a not-for-profit hospital, and I can say with my crystal ball that there will never be a Aaa rating,” Goldstein said. This should not surprise anyone, she added, noting that not-for-profit healthcare ratings are traditionally lower than other municipal ratings due to enterprise risk. Approximately 10 percent of hospitals rated by Moody’s earned a speculative grade credit rating, equivalent to a “junk bond” designation.

Moody’s maintains a general negative outlook on the not-for-profit hospital sector – and has since 2008 – due to ongoing and developing risks, including low revenue growth by historic standards, a sluggish economic recovery, the transition to new payment methodologies, and the Supreme Court ruling that allowed states to opt out of Medicaid expansion.

“Not-for-profit healthcare is not on a growth trend, and the key indicator for a positive outlook is revenue growth,” Goldstein said.

Inpatient admissions are down significantly, an ominous indicator for hospitals. Indeed, Goldstein said patient volumes were down 5 to 10 percent in various regional markets, with some areas experiencing 12 percent declines. “That’s unlike anything we have seen before,” she said.

Moody’s predicts that funding and regulatory pressures outweigh any financial benefits to providers under the Affordable Care Act. “You may believe it’s good public policy,” Goldstein said. “But from a financial perspective we see the ACA as contributing to a negative outlook.”

Sequestration has contributed an additional $11 billion in cuts to not-for-profit providers, and additional challenges will arrive in the next 12-18 months, including further Medicare payment reductions, uncertainties about Medicaid expansion and insurance exchanges, seemingly permanent reductions in inpatient volumes, and greater risk-sharing with commercial payers.