CHICAGO — Fitch Ratings and Moody’s Investors Service are maintaining their negative outlooks on the nonprofit health care sector, warning that the industry faces a slew of pressures ranging from risks associated with variable-rate debt to the uncertainty of national health care reform and the likelihood of state and federal reimbursement cuts over the next 12 to 18 months.
While still grappling with the market turmoil and economic recession of 2008, providers now face “one of the toughest environments in decades,” Moody’s said in a recent report.
For example, nearly $19 billion in letters of credit are due to be renewed over the next two years, posing a significant non-renewal risk for borrowers who will compete for scarce, and expensive, bank credit, analysts said.
Both agencies revised their outlooks to negative in late 2008, a year marked by the collapse of the auction-rate debt market and a weakening economy. Many hospitals have started to recover, but now face a new set of fiscal and economic pressures.
The impact of some form of health care reform remains one of the sector’s major uncertainties, along with the end of the federal stimulus program, which bolstered states’ budgets over the last two years and prevented deep cuts in Medicaid reimbursements.
“Over the near term, the evolving elements of health reform, lingering recessionary effects, continued instability in the financial sector, and governmental cost-containment efforts will pressure many providers’ revenues, operations, profitability, and capital access,” Fitch said in its report, which was released yesterday.
Debt structures and high capital needs remain top factors driving the negative outlook. Hospitals with a high proportion of variable-rate debt have started to issue fixed-rate debt in order to eliminate some interest rate and credit-related risks associated with the variable-rate debt.
Others have terminated interest-rate swaps, and changes in interest rates have resulted in some swap collateral being returned to hospitals, Moody’s noted. But analysts from both agencies said they will continue to pay close attention to debt structure going forward.
“Even with a moderate easing of the debt market and the partial return of the equity market, we believe hospitals will continue to face risks related to their debt structures, significantly with respect to the 'bubble’ of renewals of bank letters of credit and standby bond purchase agreements in the next 12 to 18 months,” Moody’s said.
The market’s “wild ride” over the last two years has provided quick lessons for many hospital management teams, Fitch analyst Anthony Houston said in a teleconference call the rating agency hosted yesterday to discuss its new report. “This dislocation has brought a new appreciation for the financial market crisis and the need to align debt structure with investment allocation,” Houston said.
Fitch expects hospitals to continue to issue mostly fixed-rate debt and avoid variable-rate debt. The move will likely mean an increase in a borrower’s debt service, but it’s an increase that “will be absorbed, as maximum annual debt service is usually only a small portion of annual expenses,” Houston said.
Meanwhile, the biggest nonevent of 2009 was the passage of some form of national health care reform, said Fitch analyst Jeff Schaub. While the future of reform is uncertain, the underlying factors that drove the reform effort — such as high uninsured rates and rising costs — will remain, Schaub said.
Even without large-scale national reform, hospitals are likely to see major cuts in Medicaid and Medicare reductions starting in 2010 and beyond.
Medicare accounts for 42% of hospital gross revenue, leaving them “highly vulnerable to changes” in reimbursement, Moody’s said. Medicaid accounts for 11%, and as states grapple with declining revenue, reimbursements cuts are likely.
