CHICAGO — The new federal health care law’s emphasis on high-quality, low-cost medical care could have widespread credit implications for the sector, Moody’s Investors Service said in a report last week.

Well-managed hospitals that are starting to implement many of the large-scale structural changes tied to the new law — particularly by creating a “culture of accountability” for patient care and financial reporting — could find themselves candidates for upgrades.

But hospitals that are unable to maintain a healthy financial position in the new “era of reform” could face downgrades, Moody’s warned.

Many providers will look to partner with other facilities to mitigate the costs, joining the growing mergers-and-acquisitions trend.

Federal health care reform poses one of the chief challenges to a sector that is viewed by analysts as recovering but still struggling after two years of revenue and volume declines. Moody’s and Fitch Ratings maintain negative outlooks on the sector.

Hospitals under the new law face greater scrutiny, changes in reimbursement methods, the need for expensive and sophisticated information technology, and stronger relationships with doctors.

They  also need to meet the new requirements while maintaining a strong financial position, particularly for those issuers who want to retain access to the debt markets, Moody’s said.

“Unquestionably all hospitals will face more scrutiny and regulation than ever before, driving the need for greater financial transparency and accountability,” Moody’s analyst Lisa Goldstein wrote in the report, “Achieving Greater Cost and Quality Accountability Will Be Credit Positive for Not-For-Profit Hospitals in Era of Reform.”

“Likewise, strong financial performance will be necessary to have access to the capital markets, fund physician and IT strategies, afford growth opportunities, pay debt service, and build cash reserves to weather the uncertainties that health care reform brings.”

Moody’s predicts that many hospitals will increase spending on information technology to meet new federal goals. In some cases, IT spending will begin to surpass traditional construction spending, Goldstein said.

Hospitals typically do not finance technology with bonds due to its relatively short asset life. Instead, many hospitals will use lease revenue and cash as funding sources.

A looming challenge for hospitals under the new law will be the move to a fixed-payment reimbursement structure that in 2013 will start to replace the current fee-for-service model for certain Medicare services.

The fixed-payment model shifts much of the risk for managing costs to a hospital, Moody’s said.

Providers will also need to manage the new payment model along with the current fee-for-service approach.

But if the government’s fixed-payment reimbursement method ends up driving down costs, many insurance companies will likely adopt the model, Moody’s said.

Mergers and acquisitions, meanwhile, will likely continue across the sector as hospitals that are unable to absorb many of the new federal changes will look for partners for help.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.