Mixed credit grades for nonprofit hospitals reflect uncertainty

Moody's Investors Service issued more downgrades than upgrades for nonprofit hospital credit ratings in the second quarter of 2007.

Although experts say the 1.3-1 ratio actually is better than it has been in times past, it is not certain when that trend will reverse.

Moody's downgraded 12 ratings and upgraded nine from January to March.

The ratings represent Moody's grades on hospital-issued bonds. A downgrade generally causes a decline in the market price of a bond, which is often traded after it is sold.

More important for the hospitals, a downgraded rating means that a system likely would have to pay out a higher interest rate for any future bond offering.

For upgrades, the opposite occurs -- the market price rises, and the interest rate falls.

For the full first half of the 2007 fiscal year, the downgrade-to-upgrade ratio was 1.4-to-1, which beats the 1.5-1 ratio from the first half of 2006.

Upgrades last outpaced downgrades during the 2005 fourth quarter, by a difference of 11 to 7, according to Moody's.

"The industry right now is fairly stable," said Lisa Martin, Moody's senior vice president.

"It's closer to a 1-1 ratio than we've seen historically. For the short term, we see relative stability, because we're seeing operating performance at peak levels. It's a relatively favorable reimbursement environment in terms of the rate increases hospitals get under Medicare and commercial payers," Martin said.

The two- to three-year outlook is more uncertain, she said.

"We're starting to see the very, very beginnings of some greater operating challenges for hospitals," Martin said. "That's related to patient volume trends that are fairly flat. There's a very low growth of admissions and outpatient procedures."

Catherine Jacobson, the chief financial officer of Rush University Medical Center in Chicago and secretary-treasurer of the Healthcare Financial Management Assn., said nonprofit hospital system operating margins were still strong but were starting to weaken.

"Volume is soft, and it's continuing to remain soft. There are expense increases in supplies, cost and bad debt," she said. "Debt leverage positions are weakening, and that's mainly because [hospitals] are borrowing more money than ever because of the great deal of capital spending going on."

Jacobson said operating margins are strong compared with past levels, but they're not keeping pace with the trends on expenses.

Martin said operating margins peaked in 2005 and started to moderately decrease in 2006.