CHICAGO — Moody’s Investors Service downgraded more nonprofit health care providers than it upgraded during the third quarter, a trend it expects to continue through 2011, the agency said in a new report.
The shift towards more downgrades reverses the trend that characterized the first half of 2010, which saw more nonprofit health care upgrades than downgrades.
It was the first time in a calendar year that downgrades outpaced upgrades and the number of upgrades has declined steadily the last three quarters, analysts said. The third quarter’s trend marks a return to the norm — downgrades have generally outpaced upgrades in the nonprofit health care sector since 2007.
The downward rating pressure is the product of a number of fiscal and economic pressures facing nonprofit health care issuers. Moody’s and Fitch Ratings continue to maintain negative outlooks on the sector, predicting downgrades are likely to continue to outpace upgrades for the next 12 to 18 months.
The industry’s health is a key question as it prepares to implement sweeping changes tied to the new federal health care law.
“We expect downgrades to again exceed upgrades in the fourth quarter, and into 2011, as many providers have already removed the 'low-hanging fruit’ in their expense structures,” Moody’s analyst Nyisha Hohn-Cox wrote in the report, the agency’s quarterly ratings monitor. They “must now extract efficiencies from fundamental operations to maintain current levels of financial performance.”
The sector’s top financial challenges include declining volumes, economic weakness at both the national and regional level, and reduced Medicare rates.
“The key factors driving many of the rating downgrades in the third quarter reflect ongoing deterioration in operating performance largely driven by volume declines, increased uncompensated care, and weakened balance sheet metrics,” Hohn-Cox wrote.
The amount of downgraded debt in the nonprofit health care sector totaled $1.2 billion in the third quarter — equaling the amount of upgraded debt. Three larger providers with more than $300 million each were upgraded, Moody’s said.
The agency downgraded 11 providers during the third quarter and upgraded seven. Of the 11 downgraded providers, eight started as investment grade, including four formerly A-rated issuers, Moody’s said. Two Baa-rated providers were downgraded within that category, and two hospitals were downgraded to below investment grade.
Pennsylvania led all states in the number of downgrades for providers based there in the first three quarters of 2010, accounting for nine of 31. The state’s weakening demographics are partly to blame, analysts said.
The other downgraded providers during the third quarter were located in California, Ohio, Georgia, and Texas.
Most rating actions were affirmations, in keeping with historical trends. Moody’s affirmed 63 providers during the quarter, accounting for nearly 80% of all rating actions.
