NEW YORK - Rating activity for the U.S. not-for-profit healthcare sector in 2011 marked the sixth consecutive year in which downgrades outpaced upgrades as many providers continue to struggle to maintain margins in a sluggish economy, says Moody's Investors Service in a new report. The 34 downgrades to 23 upgrades made for a ratio of 1.5 to 1.
"Revenue and volume growth have been brought to a halt as opportunities to maintain margins by cutting excess expenses are dissipating, supporting our negative outlook for the sector," said Moody's Associate Analyst Jennifer Ewing, author of the report.
Despite these continued pressures, Moody's reports that 2011 represented a material decline in rating volatility as the 57 rating changes are down from the 84 in 2010, a level that had not been seen in over a decade.
In addition to the 34 downgrades being lower than in recent years, 2011's 23 upgrades are a drop from the 40 in 2010, the highest level of upgrade activity since 2005.
"This is largely due to the benefits from expense reductions that took place at the beginning of the recession, improved balance sheet measures, and the benefit from several new provider fee programs in numerous states," said Ewing. "Over the next two to three years, annualized savings from these expense reductions and the provider programs may stymie the rate of downgrades."
The number of downgrades may also be limited, she explained, by increased consolidation activity if the integration produces the expected operating benefits or if the merged hospitals see their debt assumed or refinanced by the larger credit. However, short-term disruptions often seen with merger or acquisition strategies can quickly lead to credit deterioration.
"Despite the slowdown in rating changes in 2011, we expect the trend favoring downgrades over upgrades to continue in 2012 as payor pressure accelerates, creating flat revenue growth," said Ewing. "With much of the low-hanging expense reductions already implemented, management teams and boards of directors will now need to make deeper expense cuts, including through the reshaping of their models of healthcare delivery."