Transcript Title Slide with one line headline

Moody’s Not-For-Profit
Healthcare Outlook
Brad Spielman, Vice President
Healthcare Ratings Group
San Francisco, CA
(415) 713-3223
Moody’s Healthcare Portfolio

We rate ~530 not-for-profit hospitals and
healthcare systems (~1,200 total hospitals)
– Approximately $113 billion of total rated debt
outstanding
– Stand-alone hospitals (as small as 2,000
admissions)
– Multi-state systems (with more than 400,000
admissions)
– Specialty hospitals

Not-for-profit healthcare median rating is A3
Moody’s Industry Outlook: 2008 - 2009
In September 2008, Moody’s reaffirmed the
stable outlook on the U.S. Not-for-Profit
Healthcare Industry:
Most hospitals and health systems continue to
show resiliency in financial performance;
Medicare rates for FY 2009 appear
relatively favorable
However, substantially weaker economy in 2008
has created more challenging operating
environment
3
Weaker Economy Has Created Challenges
Higher charity care levels
Employers discontinue coverage; more working poor
Increased bad debt expense
Co-pay and higher deductible products
Softening inpatient volumes
Patients self-regulate healthcare needs, postponing elective procedures
Fundraising may suffer
Recent consumer and corporate wealth declines
Potential reductions in Medicaid funding
Several state economies have weakened over the past year
Decline in unrestricted cash
Market turmoil has lead to large losses
4
Hospitals are Reacting Quickly to Challenges

Productivity benchmarking regarding FTEs

Length of stay reductions

More aggressive upfront registration

Outsourcing of certain functions

Greater investment in IT; more rapid installation
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Medicare Rates for FFY 2009
Relatively Favorable




3.6% increase for inpatient rates; 3.0% for
outpatient
42 compliance measures for quality; down from
72 that were proposed, easing the burden
Non payment for “never-events” begins Oct 1st
Uncertainties surrounding “bundled payment”
concept; testing begins in 2009 in four states
6
FY 2007 Medians: Down from FY 2006, Still Favorable to
Years Following Balanced Budget Act of 1997
Ratio
2006
2007
1999
Operating Margin
2.3%
2.1%
0.51%
Operating Cash
9.2%
9.0%
9.0%
MADS Coverage
3.9x
3.9x
3.04x
Days Cash on Hand
154.3
156.6
146.5
Cash-to-Debt
109.0%
110.9%
90.6%
Debt-to-Cash flow
3.6x
3.7x
4.07x
Debt-to-Cap.
38.9%
38.6%
37.8%
Flow Margin
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How Is the Industry Doing?
Number & Percentage of Hospitals with Operating Profit
400
100%
329
333
311
300
284
75%
80%
81%
76%
77%
69%
200
50%
100
25%
0
Percentage
Number
315
0%
2003
2004
2005
2006
2007
Compares favorably to 2000 when 57% of hospitals reported an
operating profit
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How Is the Industry Doing? Another Look
Percentage of Hospitals with Operating
Improvement over the Prior Year Profit
70%
64%
60%
60%
50%
47%
44%
40%
2004
2005
2006
2007
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Looking Forward
-
Expect continued moderating in financial performance in FY 2008
-
Competition for patients will continue; leading to softer patient
volumes, particularly ambulatory setting
-
Medicare:
-
Recovery Audit Contractor (RAC) initiative will increase
pressure on revenues
-
Uncertainty regarding CMS “bundled payment” concept may
pressure performance
-
Rates for FFY 2009 appear relatively favorable
-
Cost reduction efforts will be key going forward
-
Increased capital appetite as the population ages
10
Financing Trends
-
High volume of issuance driven by replacement of Auction
Rate Products, and Insured Variable Rate Demand Bonds
-
Uninsured Fixed Rate Bonds; issuers looking for greater
flexibility to issue bonds backed by only their own credit
-
Variable Rate Demand Bonds backed by Letters of Credit
or Self Liquidity, driven in part by pre-existing swap
portfolios
-
Increased rating activity
-
Market volatility require issuers to be nimble, flexible
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Appendix I
Recent Rating Trends
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Rating Activity Remains Favorable;
Nearly Equal Downgrades to Upgrades
through June 2008
60
50
40
30
20
10
0
2001
2002
2003
2004
Upgrades
2005
2006
2007
Jun-08
Downgrades
13
Nearly Two Decades of
Industry Shifts and Ratings Changes
Negative
Volatility postBBA
Stabilization
Medicare PPS, TRA Relative stability (pre-BBA)
returns
Stabilization
0.0
1.0
2.0
3.0
4.0
5.0
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Ratio of downgrades to upgrades
14
Not-for-Profit Healthcare Ratings:
More Spec Grade Than Other Muni Credits
About 10%
(or 50) of
Moody’s
ratings are
below
Investment
Grade
16%
12%
Unrated market of
small healthcare
organizations:
nearly all spec
grade
8%
4%
C
Ca
Ca
a1
Ca
a2
Ca
a3
B3
B2
B1
A3
Ba
a1
Ba
a2
Ba
a3
Ba
1
Ba
2
Ba
3
A2
A1
Aa
3
Aa
2
Aa
1
Aa
a
0%
(544 Ratings; Excludes Credit Enhanced Ratings)
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Not-for-Profit Hospital Ratings Distribution
Ratings Distribution
(531 credits)
Outlook Distribution
100%
RUR-Down
80%
Negative
60%
40%
Stable
Positive
20%
0%
Aaa
Aa
A
Baa
<Baa
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