Moody's: 2012 Not-for-Profit Healthcare Sets Record in Downgraded Debt

Moody's Investors Service said it downgraded a record $20 billion in not-for-profit healthcare debt in 2012, an increase of 213% from the $6.4 billion downgraded in 2011, and the highest amount of downgraded debt in one year in the sector since the rating agency began tracking the metric in 1995.

The $20 billion in downgraded debt was more than double the year's $9.7 billion of upgraded debt, according to the rating agency report, "US Not-For-Profit Healthcare Rating Activity in 2012 Sets Record for Downgraded Debt."

"The downgrades in 2012 were driven by volume declines and weaker or negative revenue growth contributing to weakening operating performance and debt service coverage," said Moody's Associate Analyst Carrie Sheffield. "The downgrades were also driven by declines in liquidity, more competition, increased debt load, and many hospitals faced management and governance issues and pressures on pension funding."

Three large health systems were responsible for the majority of the downgraded debt as downward revisions in ratings for Catholic Health Initiatives in Colorado, Dignity Health in California, and New York's Memorial Sloan-Kettering Cancer Center comprised nearly $13 billion of the $20 billion.

Even so, the increase in the absolute level of downgraded debt in not-for-profit healthcare tracks to the reported $311 billion of public debt downgraded in 2012 across all of Moody's public finance sectors compared to $24 billion of debt upgraded. It reflects providers' continued struggle to maintain margins as tepid economic growth contributes to slow revenue and lackluster volume growth.

"The industry remains under pressure from policymakers and the public to reduce costs," said Sheffield. "Medicare funding, the largest single revenue source for most not-for-profit hospitals, is a main target of federal deficit reduction plans."

Medicaid revenues also remain under pressure, and some states have opted out of healthcare reform's expansion of Medicaid. Many hospitals also report single-digit to flat rate increases from commercial insurance payers, contributing to ongoing revenue pressure.

Rating activity for the not-for-profit healthcare sector in 2012 marked the seventh consecutive year in which downgrades (40) outpaced upgrades (38) for a ratio of 1.05 to 1.

The 38 upgrades also represent an increase over 2011's 23 upward rating revisions.

"Rather than coming from fundamental credit improvement, many of the upgrades were due to consolidation as the debt of a lower-rated hospital was guaranteed by a higher-rated system upon merging," said Sheffield. "Downgrades are likely to increase in 2013 but consolidation may serve as an important check on the trend even though it sometimes causes credit deterioration."

In addition to merger activity, Moody's reports that the increased number of rating upgrades in 2012 was due to favorable stock market returns of recent years, and interest rates that have allowed many hospitals to refinance or issue new debt at historically low costs.

 

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