Nonprofit hospitals face downgrades in credit ratings

The flagging economy and volatile stock market are being reflected in nonprofit hospitals' credit ratings. Those facilities will have to pay either a higher interest rate on their debt or a higher rate for future borrowing -- or both.

Moody's Investors Service reported that the number of downgrades it issued in 2008 for nonprofit hospitals exceeded upgrades by the largest margin in five years.

Moody's upgrades affected $13.1 billion in debt, while the downgrades affected $9.2 billion. The fact that more total debt in dollars was upgraded than downgraded, despite the gap between downgrades and upgrades, shows the hospitals most affected, analysts said. Those would be facilities already facing financial trouble before the recession, and those that have a high percentage of uninsured and indigent patients.

But the health of the whole nonprofit sector is getting worse, according to ratings agencies. Fitch Ratings switched its outlook for the nonprofit hospital and health care system sector from stable to negative in late December 2008. Fitch expects downgrades to exceed upgrades for the next 18 to 24 months.

Both ratings firms pointed to the weakened economy, which they said has produced an increase in uncompensated care, fewer elective procedures and investment losses by the hospitals.

Moody's issued 53 downgrades in 2008 compared with 27 upgrades, widening the margin from 1.3 to 1 in 2007 to 2 to 1 in 2008, said Deepa Patel, an associate analyst for the ratings firm. That was the widest margin since 2003. Patel said an unprecedented 27 of those 53 downgrades came in the fourth quarter, compared with four upgrades.

Fitch analyst Jeff Schaub said downgraded hospitals tend to have extreme deterioration, unavoidable capital spending commitments or other drains on liquidity such as overly aggressive investment allocations and precarious debt structures.

Hospitals in poorer neighborhoods, with a larger number of uninsured and indigent patients, tend to be on the downgrade list, but Richard Gundling, vice president of the Healthcare Financial Management Assn., said that scope has become much larger now. "In this environment, there are not a whole lot of bright spots. Everyone is feeling the pinch," he said.

The economy and market turmoil already have caused some hospitals to lay off employees or cut salaries, according to an October 2008 American Hospital Assn. survey. The survey found that 53% of the 736 hospitals responding were considering staff cutbacks. Clerical and administrative staff were most affected, but some hospitals laid off employed physicians as they closed money-losing departments and others asked physicians to take a pay cut equal to that taken by top executives. Meanwhile, many systems have scrapped plans for new projects, citing the cost of borrowing or a lack of access to credit.

The outlook for for-profit hospitals is somewhat rosier. A December 2008 Moody's report said for-profit hospitals actually could grow in 2009 by buying some of the struggling nonprofits. The report said for-profits ended 2008 with good liquidity and unused capacity from bank credit, which could be used for those purchases.

Lauren Coste, director of corporate finance for Fitch Ratings, agreed it is possible for some stronger for-profits to grow through acquisition, but not right away. "Even the strong for-profits are a little bit nervous right now as market conditions are so weak," she said. "There are some who say it should be better at the end of 2009."

Coste said the for-profit industry showed some signs of pressure in the third quarter of 2008, with bad debt expense increasing and admissions down. But for-profits are less dependent on short-term financing, and the stronger ones have less debt.

Upgrades

Here is a list of upgrades from both Moody's (designated as M) and Fitch (F):

Arizona: Scottsdale Healthcare Corp. (F).

Arkansas: Washington Regional Medical Center, Fayetteville (M).

California: City of Hope National Medical Center, Duarte (F); Community Hospital of the Monterey Peninsula (F); El Camino Hospital, Mountain View (M); Scripps Health, San Diego (M); Stanford Hospitals and Clinics, Palo Alto (M, F).

Colorado: Poudre Valley Health Care, Fort Collins (M).

Florida: Sarasota County Public Hospital Board, (F); South Lake Hospital Inc., Clermont (F).

Illinois: Advocate Health Care Network, Oakbrook (F); Evanston Northwestern Healthcare Corp. (now NorthShore University HealthSystem), Evanston (M).

Indiana: Jackson County Schneck Memorial Hospital, Seymour (F); Reid Hospital and Health Care Services, Richmond (F).

Maryland: Carroll Hospital Center, Westminster (M); Howard County General Hospital, Columbia (M); MedStar Health Inc., Columbia (F).

Massachusetts: Dana-Farber Cancer Institute, Boston (M); Northern Berkshire Health Systems, North Adams (F).

Michigan: Detroit Medical Center (F).

Missouri: Ascension Health, St. Louis (M); Ascension Health (subordinated debt), St. Louis (M); Capital Regional Medical Center, Jefferson City (M).

Nebraska: Nebraska Medical Center, Omaha (M).

New Jersey: Atlantic Health System, Morristown (M); Cape Regional Medical Center, Cape May Court House (F); Saint Francis Health Care System, Trenton (F).

New Mexico: Rehoboth McKinley Christian Hospital, Gallup (F).

New York: Highland Hospital, Rochester (M); Lenox Hill Hospital, New York (M); Mount Sinai Hospital, New York (M); New York City Health and Hospitals Corp. (F); Staten Island University Hospital (M, F).

North Carolina: Duke University Health System, Durham (M); FirstHealth of the Carolinas Inc., Pinehurst (F); Southeastern Regional Medical Center, Lumberton (F).

Ohio: Cleveland Clinic Health System (M); OhioHealth, Akron (M); University Hospitals Health System, Cleveland (M).

Oklahoma: Saint Francis Health System, Tulsa (M).

Pennsylvania: Pocono Medical Center, East Stroudsburg (F).

Rhode Island: Newport Health Care Corp. (F).

Tennessee: Baptist Health System of East Tennessee Hospital, Knoxville (M); Blount Memorial Hospital, Maryville (M).

Texas: Northeast Hospital Authority, Humble (M).

West Virginia: Princeton Community Hospital (M).

Wisconsin: Aurora Health Care Inc., Milwaukee (F); Froedtert and Community Health, Milwaukee (F); Gundersen Lutheran, LaCrosse (M).

Downgrades

From both Moody's (designated as M) and Fitch (F):

Alabama: DCH Regional Medical Center, Tuscaloosa (M).

Arkansas: Sparks Regional Medical Center, Fort Smith (M).

California: Antelope Valley Healthcare District, Lancaster (M); Citrus Valley Health Partners, West Covina (M); Hospital of the Good Samaritan, Los Angeles (M); Loma Linda University Medical Center (M); Valley Health System, Hemet (F).

Colorado: National Jewish Health (formerly National Jewish Medical and Research Center), Denver (F).

Delaware: Nanticoke Health Services, Seaford (F).

Florida: Lee Memorial Hospital, Fort Myers (M); University Community Hospital, Tampa (M).

Georgia: Columbus Regional Healthcare System (F); Memorial Health University Medical Center, Savannah (M).

Hawaii: Kuakini Health System, Honolulu (M).

Idaho: Portneuf Medical Center, Pocatello (M).

Illinois: Advocate Condell Medical Center, Libertyville (M); Alexian Brothers Health System, Arlington Heights (F); Elmhurst Memorial Healthcare (M, F); Loyola University Health System, Maywood (M); Resurrection Health Care, Chicago (F).

Indiana: Cardinal Health System Obligated Group, Muncie (M); Methodist Hospital, Gary (M).

Kentucky: Appalachian Regional Health Care Inc., Lexington (F).

Louisiana: Touro Infirmary, New Orleans (M).

Maryland: Doctors Community Hospital, Lanham (M).

Massachusetts: Saints Medical Center, Lowell (M); Valley Health Systems (Holyoke Hospital) (F).

Michigan: Marquette General Hospital (M); North Oakland Medical Center, Pontiac (M); William Beaumont Hospital, Royal Oak (M, F).

Missouri: Sisters of Mercy Health System, Chesterfield (M); South Barry County Hospital District, Cassville (M).

New Hampshire: Crotched Mountain Rehabilitation Center, Greenfield (M).

New Jersey: Deborah Heart & Lung Center, Browns Mills (M); JFK Medical Center/Hartwyck at Oak Tree, Edison (M); Muhlenberg Regional Medical Center, Plainfield (M); Palisades Medical Center, North Bergen (M, F); Saint Barnabas Health Care System, Toms River (F); Southern Ocean County Hospital, Manahawkin (F).

New York: Community-General Hospital of Greater Syracuse (M); Orange Regional Medical Center, Goshen (M); New York Methodist Hospital, Brooklyn (M).

North Dakota: Meritcare Health System, Fargo (M).

Ohio: Firelands Community Hospital, Sandusky (M); Forum Health System, Youngstown (M); St. Luke's Hospital, Maumee (M).

Oklahoma: Norman Regional Hospital Authority (M); St. John Health System, Tulsa (M); Valley View Regional Medical Center, Ada (M, F).

Oregon: Cascade Health Services, Bend (M); Legacy Health System, Portland (M).

Pennsylvania: Crozer-Chester Medical Center, Upland (M); Doylestown Hospital (M); Jefferson Regional Medical Center, Jefferson Hills (M); KidsPeace Inc., Orefield (M); Lewistown Hospital (M); Lower Bucks Hospital, Bristol (M); Sacred Heart Health System, Allentown (M); West Penn Allegheny Health System, Pittsburgh (M, F).

Rhode Island: St. Joseph Health Services of Rhode Island, North Providence (M, F); Westerly Hospital (M).

Virginia: Martha Jefferson Hospital & MJH Foundation, Charlottesville (M); Prince William Health System, Manassas (F); Prince William Hospital, Manassas (M).

West Virginia: Cabell Huntington Hospital, (M).

Wisconsin: Wheaton Franciscan Services, Glendale (M).