CHICAGO - Credit quality is beginning to deteriorate across the not-for-profit health care sector as providers grapple with an array of financial pressures, said Standard & Poor's in a pair of reports on the sector released yesterday.
While the same pressures are hitting health care systems and stand-alone hospitals, systems are generally more capable of withstanding the problems, analysts said. Despite declines in operating margins and other key fiscal measures, many higher-rated systems continued to turn in strong performances last year and through the first half of 2008.
Soft volumes, bad debt, declining operating margins, declining investment returns, and the national larger economic slowdown are all squeezing margins across the sector, analysts said. For the second year in a row, operating margins declined across the sector.
"What we saw in this decade so far is the sector as a whole, both systems and stand-alones, did fairly well, and their median ratios got stronger," said Liz Sweeney, director of health care ratings at Standard & Poor's. "Last year we saw that flatten out and this year start to flatten some more."
When it comes to stand-alone hospitals, Standard & Poor's downgraded 45 hospitals and upgraded 26 in 2007. So far this year the rating agency downgraded 31 and upgraded 11. The number of system downgrades more than doubled this year from 2007. Analysts expect the trend to continue in light of deteriorating operations and aggressive capital plans.
The turmoil in the capital markets starting in late 2007 has meant a drop in investment returns - an area that had been one of the few bright spots for stand-alone facilities last year. The continued turmoil likely will mean greater declines throughout 2008, analysts said.
On top of investment losses, many providers have been faced this year with a spike in interest-rate costs as a result of the collapse of the auction-rate debt market, a debt market long favored by health care providers.
"[Last] year as a whole was pretty good in investment markets so hospitals did okay in the end because their investments held up really well, but if you look at operating income, it was down across the board," Sweeney said.
Providers rated A or higher have increased capital spending in recent years, according to the report.
"In general in the last couple of years we've really seen a lot more capital expenditures," said analyst Cynthia Keller Macdonald.
The spending has resulted in a relatively low average facility age of about 10.5 years or less for providers rated A or higher. Spending was down among triple-B rated credits, said analysts.
"I don't think we've seen the end of it," Keller Macdonald said.
"I don't think financial pressures are going to go away; they're going to stay the same or potentially increase, especially because of issues in investment markets," she said. "That's helped to boost cash flow and put money in the bank as a cushion and going forward, that [investment decline], combined with regular industry pressure we're seeing, things could get slightly worse."
