Inside hospital credit ratings

A hospital’s credit rating – like everyone’s credit ratings – determines borrowing power. But how do the credit ratings agencies determine hospitals’ ratings? And what are the differences between hospitals receiving high ratings and those receiving low? Healthcare Finance News talked to some ratings experts to get the inside scoop.

When determining a hospital’s credit rating, credit rating agencies look at several factors, the largest two being a hospital’s enterprise profile and their financial profile, said Martin Arrick, managing director of U.S. public finance for Corporate & Government Ratings at Standard & Poor’s.

[See also: Risk sinks U.S. hospital credit ratings]

“Generally, higher-rated hospitals have a strong financial profile with some combination of a strong balance sheet and income statement,” said Arrick. “Those hospitals also have a strong market share with trends demonstrating growing volumes and admissions. Often, the hospitals also have unique services that no one else has.”

Market share can play a big part when it comes to a hospital’s rating, said Megan Neuburger, senior director of U.S. Corporates at Fitch Ratings.

“Systems that have multiple hospitals or clinics in other markets have diversity across the continuum of care, and that can be really helpful in credit ratings,” she said. “It can garner market share and help the relationship with commercial payers.”

Other characteristics of high-rated hospitals include strong, well-seasoned management teams, low debt flow, and diversity of revenue sources across geographical areas with a strong market share, said Dan Steingart, assistant vice president and analyst at Moody’s Investors Service.

Hospitals with lower ratings, on the other hand, tend to have a weak balance sheet with higher debt flow, and they are often losing volume, explained Arrick.

There are things these hospitals can do to boost their credit ratings, said Arrick, Steingart and Neuburger.

Some merge or join larger, higher-rated hospitals, said Steingart. Others recruit new doctors and open new services to expand their business, said Arrick, which can demonstrate a growth trend in revenue. Focusing on investing in new services in faster growing areas, say with specialty clinics, is a good option, said Neuburger, but lower-rated hospitals should also consider being financially conservative and paying off debt.

Despite their efforts, some lower-rated hospitals may find improving their ratings difficult to do, said Steingart. For instance, hospitals that rely too much on Medicare and Medicaid – a big negative factor when determining credit ratings – could diversify their payer mix, but that tends not to happen, he said. And if the area being served requires a lot of charity care, “it can often make for a very difficult financial road ahead with lower credit ratings ahead in many cases.”