CHICAGO - The not-for-profit health-care sector continued to suffer from a variety of fiscal ills throughout 2008, with most credit measures declining across all rating categories and affecting even the largest and most highly rated systems, Moody's Investors Service said in a report on the sector's 2008 medians released Friday.
The problems are likely to persist and weaken operating performance throughout 2009, perhaps limiting access to capital funding, according to Moody's.
Like Fitch Ratings and Standard & Poor's, Moody's maintains a negative outlook on the nonprofit health care sector, which is particularly vulnerable to fallout from the national recession. Moody's revised its outlook to negative in November 2008, citing issues with accessing credit, weakened operating performance, liquidity losses, and other problems.
A look at sector medians in 2008 confirmed those trends, says Moody's analyst Brad Spielman, who wrote the report, "Not-for-Profit Healthcare Medians for Fiscal Year 2008 Show Weakening Across All Major Ratios and All Rating Categories." Nearly a third of all health care credits rated by Moody's reported a loss from operations in 2008, the highest amount in at least five years.
Meanwhile, the sector is unlikely to see much of a boost from ongoing efforts to reform the health care industry, Moody's said. While hospitals would benefit from an increase in insured patients, it is likely that reform would mean reductions in Medicare and Medicaid reimbursements.
Funding for a government plan remains largely unknown, Spielman noted in the report.
The health care sector has for years seen a so-called credit gap, in which smaller, lower-rated hospitals suffer greater credit declines than larger, higher-rated systems. But market conditions in 2008 affected the larger, higher-rated systems sometimes more harshly than the smaller ones.
For example, highly rated issuers saw larger liquidity losses and more exposure to puttable debt in 2008 than lower-rated credits, Moody's said. The amount of puttable debt - typically in the form of variable-rate debt or commercial paper - held by a system became an increasingly important credit measure last year amid the market turmoil.
For double-A rated systems, the median amount of puttable debt was $225 million, while for A-rated systems it was just $25 million, Moody's said. But at the same time larger systems had more unrestricted resources to cover potential puts, analysts noted.
Highly rated credits in fiscal 2008 saw more rating pressure than the lower-rated credits, revealing that "size may be a porous barrier to the ill-effects of the economy," Spielman said.
Moody's downgraded 16 systems rated A or Aa in the first quarter of 2009 compared to a total of 17 downgrades in those categories during all of 2008. In contrast health care issuers rated Baa stayed consistent, with 13 downgrades in the first quarter of this year and 23 during all of last year.
"While downturns in the past have at times bypassed stronger organizations, more significantly affecting the weaker rating categories, the current situation is having a material effect on credits across the rating spectrum," Spielman said. "Median operating performance and liquidity have weakened in every rating category."
Despite their challenges, many hospitals continued to spend on capital projects in 2008, though at a slower pace than in previous years. The increase in capital spending led to an increase in 2008 in the level of total debt relative to cash balance and operating performance, Moody's said. Median maximum annual debt service coverage ratio fell to 3.6 times in fiscal 2008 from 4.0 times in 2007.
"Along with the drop in days-cash-on-hand, the decline in cash-to-debt illustrates the rapid decline of core balance sheet strength which occurred over the last year," Spielman wrote. "This combination of weakening balance sheets and the continuing decline of operating performance challenges the general credit profile of the sector."
Moody's bases its medians on the financial results of 407 hospitals and health care systems and 16 multi-state systems.