Moody's: Downgraded Non-Profit Healthcare Debt Exceeds Upgraded Debt

The $2.78 billion of downgraded debt of the U.S. not-for-profit healthcare sector in the second quarter exceeded the dollar amount of upgraded debt, $2.11 billion, for a ratio of 1.32 to 1, says Moody's Investors Service in a report, "US Not-For-Profit Healthcare Quarterly Ratings: Downgraded Debt Trumps Upgraded Debt in Second Quarter 2012, Reversing Prior Trends."

The finding contradicts eight of the past 13 quarters in which total upgraded debt exceeded downgraded debt as many of the upgrades were for larger systems that carry more debt than smaller providers.

"The increased proportion of downgrades were driven by the continued slow economic recovery, increasing pressure on state budgets, and a large and growing federal deficit," said Moody's Associate Analyst Carrie Sheffield, author of the report. "The deficit problem may lead to reductions in Medicare and Medicaid, which translate into weak volumes and revenue declines for hospitals."

The number of downgrades, 12, also surpassed the quarter's nine upgrades for a ratio of 1.33 to 1. The ratios are in keeping with the negative conditions faced by the sector, according to the Moody's report.

"Also, the majority of hospital ratings now under review are being considered for possible downgrade," said Sheffield. "We believe that downgrades will continue to outpace upgrades with upgrades due primarily to strong management, increased revenues from state provider taxes, and mergers."

Consistent with the longstanding trend of affirmations far exceeding rating changes, Moody's affirmed 84 ratings in the second quarter, representing 80% of all rating activity and affecting approximately $55.5 billion of debt. Five of the rating affirmations had outlook changes in the negative direction and six in the positive direction.

"Despite the increase in positive outlooks over negative outlooks, we still believe downgrades will continue to outpace upgrades," said Sheffield.

The Moody's report also captured rating activities for the first half of this year. They included 23 downgrades and 20 upgrades, although upgraded debt of $4.86 billion debt was greater than downgraded debt of $4.22 billion.

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