Moody’s down on hospital credit
The cooling economy continued to put a drag on not-for-profit hospitals as spring turned to summer. Between April and June, the sector saw more rating volatility, and Moody’s Investors Service downgraded more debt than it upgraded, according to a report released last week.
That’s the reverse of the typical pattern, and it may persist amid “the continued slow economic recovery, increasing pressure on state budgets and a large and growing federal deficit that may lead to reductions in Medicare and Medicaid which translate into weak volumes and revenue declines,” Moody’s said.
Moody’s lowered the rating on a dozen notfor-profit healthcare borrowers with $2.78 billion in debt. Moody’s raised the credit ratings on $2.11 billion in debt held by nine hospitals and health systems during the same three months.
More often, the value of upgraded debt surpasses downgraded debt, Moody’s said. That’s because larger health systems, which have the advantage of economies of scale and also more outstanding debt, are more likely to receive credit upgrades than independent hospitals with less debt, said Beth Wexler, senior credit officer with Moody’s.
“This reverses that trend, but it is not an outlier,” Carrie Sheffield, an associate analyst with Moody’s and lead author of the report, said of the second quarter’s results.
Three large healthcare borrowers accounted for more than half, $1.7 billion, of the downgraded debt during the second quarter, Sheffield noted: Fairview Health Services, Minneapolis; Kettering Health Network, Dayton, Ohio; and Temple University Health System, Philadelphia. Fairview’s debt rating dropped to A3 from A2 after a financial downturn, the announced departure of the seven-hospital system’s chief executive and “reputational risks” after Minnesota’s attorney general released results of an inquiry into its billing and collection contractor, Accretive Health, Moody’s said.
Ryan Davenport, a spokesman for Fairview, said in an e-mail that the rating action was disappointing but “not unexpected given current events within our organization and financial challenges we’ve faced over the past couple of years.”
Wexler said the economy contributed to the weak demand at two-hospital Temple University Health System, which was downgraded to Ba1 from an investment grade Baa3.
Robert Lux, vice president and chief financial officer for Temple, said the system has seen fewer privately insured patients and more with safety net insurance since the recession. Medicaid covers 42% of the system’s patients. Medicare covers another 39%, and 19% have private insurance. More recently, “things have stabilized,” Lux said.
The Moody’s outlook for the not-for-profit sector remains negative.