S&P: Nonprofit Health Care Could Move Toward Stability This Year

CHICAGO — After two years of turmoil, the nonprofit health care sector might see some relief in 2010, Standard & Poor's said in a new outlook report.

For investors, the message is stability over the near term while challenges remain ahead, according to analyst Martin Arrick.

"There remains risk in the sector, but for right now, especially when I look at where we were a year ago, it feels like a movement to stability," he said.

The cautious optimism stems in part from fewer downgrades in the last quarter of last year, as well as the market's recovery and general improvement in operating margins across the sector.

Unlike the problems besetting the industry since 2008 — including the collapse of the auction-rate market, an inability to access capital, and a host of operational pressures — challenges this year seem more incremental, rating analysts said.

The message of stability follows less positive reports by Moody's Investors Service and Fitch Ratings, both of which affirmed their negative outlooks on health care last week. In a subsequent rating analysis released Wednesday, Moody's noted its downgrades also began to ease in the second half of 2009.

"The U.S. nonprofit health care sector is showing it's resilient," Arrick said. "It's an essential service that's being provided, and these organizations are capable of responding to a difficult environment."

All three rating agencies agree that more challenges are on the horizon. Chief among the uncertainties is the fate of a national push for health care reform, which most analysts agree is unlikely to occur this year.

Another serious pressure facing the industry starting in 2011 is the ability of fiscally stressed states to adequately fund Medicaid reimbursement.

"A lot of the stimulus money runs out this year," Arrick said. "States generally used that money to prevent harsher cuts to Medicaid and to close their budget gaps. If that goes away, it's going to be squeezed. It all speaks to incremental pressures [on health care providers]."

As the recession ebbs and the markets return, many nonprofit health care issuers are starting to take a fresh look at deferred capital projects. Hospitals returning to the debt market continue to issue mostly fixed-rate debt after two years of trying to restructure their troubled variable-rate debt. From a credit perspective, fixed-rate debt means less market- and bank-related risk, but also usually means higher interest-rate costs, Standard & Poor's noted.

"It's raising the cost of capital," Arrick said. "It's one more force that's creating incremental pressure on operating margins."

Moody's noted the number of downgrades in 2009 hit the highest level in eight years, and that the dollar amount of downgraded debt — $14.8 billion — was the highest since 2000. But unlike in 2008, downgrades began to slow in the second half of 2009. And despite challenges, Moody's said affirmations accounted for nearly 79% of all rating actions, "dwarfing the rating changes."

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