Moody’s Cites Governance as a Key Factor in Health Care Upgrades

CHICAGO — Strong governance at nonprofit hospitals appears to be a leading factor in winning upgrades, according to a report released this week by Moody’s Investors Service.

Moody’s has upgraded 20 hospitals since late last year despite persistent economic challenges plaguing the sector. Moody’s, like Fitch Ratings and Standard & Poor’s, maintains a negative outlook on the nonprofit health care sector.

While downgrades have easily outpaced upgrades in the last year and will continue to do so in the coming months, Moody’s said it expects to award some upgrades by the end of the year.

“Despite a difficult sector and a difficult market, we have been upgrading some credits,” said Moody’s analyst Lisa Goldstein, one of the authors of the report. “It’s not all been bad news.”

Some of the upgraded hospitals are based in states with particularly weak economies, such as Ohio and California. Five of the 20 hospitals upgraded are located in the New York-New Jersey metro area, which faces its own set of fiscal problems.

The factors driving the rating boosts are strong management, spending cuts, and outpatient volume growth, Moody’s said.

Nearly all the credits that were upgraded engaged in some kind of strategy to preserve their liquidity, such as scaling back capital plans, drawing on credit lines, or postponing dividend reinvestment policies.

“Governance is an important contributor to a bond rating and one of the five key factors in our rating methodology,” Moody’s analyst Jae Choi wrote in the report. “The credit impact of governance is often not observable in the short run, but usually becomes apparent during times of crisis — manifested through either strong leaders stepping in to address problems or through a board’s unwillingness or inability to handle serious problems.”

Several of the upgrades stemmed from a hospital’s ability to complete major capital projects in a timely manner. The University of Colorado Hospital Authority and Poudre Valley Health Care won upgrades after completing large capital plans that have now led to rising volumes and operating margins. Both the providers had been downgraded by Moody’s earlier due to the amount of new debt being issued. 

“There are inherent risks associated with major capital projects including disruptions to operations, delays, and cost overruns which could negatively impact operating performance and balance sheet measures,” the report said. “Several of the upgraded hospital systems, however, were successful in managing these risks and completed their major capital projects on time and on budget without impacting current operations.”

Illustrating the so-called credit gap between larger, higher-rated systems and smaller, lower-rated systems that characterizes the sector, upgrades were more likely among larger systems. Of the 20 upgrades analyzed in the report, 25% have revenues exceeding $1 billion, and 35% have revenues greater than $250 million but less than $500 million.

“These data would suggest that the larger organizations have been better able to absorb the economic challenges of the past 18 months,” Choi wrote. “However, size is not a guaranteed barrier to downgrades as some of the rating downgrades over the past year were for some of the largest hospital systems in Moody’s portfolio, including a few multi-state systems.”

Analysts upgraded hospitals in all rating categories except Aa. Two of the upgrades — Baptist Health System of East Tennessee and NYU Hospitals Center — were boosted into the investment-grade category from junk territory. Baptist Health was upgraded solely because its debt was assumed by Catholic Healthcare Partners.

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