February 19, 2009
With Economy in Shambles, Nonprofit Hospitals Face Downgrades in Credit Ratings
The current state of the economy is continuing to affect nonprofit organizations. This time, nonprofit hospitals are taking a hit. American Medical News reported yesterday that the flagging economy and volatile stock market are being reflected in those hospitals' credit ratings. Accordingly, those facilities will have to pay either a higher interest rate on their debt or a higher rate for future borrowing -- or both.
According to the AMN report, Moody's Investors Service has reported that the number of downgrades it issued in 2008 for nonprofit hospitals exceeded upgrades by the largest margin in five years.
The report continues:
Moody's upgrades affected $13.1 billion in debt, while the downgrades affected $9.2 billion. The fact that more total debt in dollars was upgraded than downgraded, despite the gap between downgrades and upgrades, shows the hospitals most affected, analysts said. Those would be facilities already facing financial trouble before the recession, and those that have a high percentage of uninsured and indigent patients.
But the health of the whole nonprofit sector is getting worse, according to ratings agencies. Fitch Ratings switched its outlook for the nonprofit hospital and health care system sector from stable to negative in late December 2008. Fitch expects downgrades to exceed upgrades for the next 18 to 24 months.
Both ratings firms pointed to the weakened economy, which they said has produced an increase in uncompensated care, fewer elective procedures and investment losses by the hospitals.
Moody's issued 53 downgrades in 2008 compared with 27 upgrades, widening the margin from 1.3 to 1 in 2007 to 2 to 1 in 2008, said Deepa Patel, an associate analyst for the ratings firm. That was the widest margin since 2003. Patel said an unprecedented 27 of those 53 downgrades came in the fourth quarter, compared with four upgrades.
Fitch analyst Jeff Schaub said downgraded hospitals tend to have extreme deterioration, unavoidable capital spending commitments or other drains on liquidity such as overly aggressive investment allocations and precarious debt structures.
Hospitals in poorer neighborhoods, with a larger number of uninsured and indigent patients, tend to be on the downgrade list, but Richard Gundling, vice president of the Healthcare Financial Management Assn., said that scope has become much larger now. "In this environment, there are not a whole lot of bright spots. Everyone is feeling the pinch," he said.
The economy and market turmoil already have caused some hospitals to lay off employees or cut salaries, according to an October 2008 American Hospital Assn. survey. The survey found that 53% of the 736 hospitals responding were considering staff cutbacks. Clerical and administrative staff were most affected, but some hospitals laid off employed physicians as they closed money-losing departments and others asked physicians to take a pay cut equal to that taken by top executives. Meanwhile, many systems have scrapped plans for new projects, citing the cost of borrowing or a lack of access to credit.
Overall, this situation does not look good!
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