Transcript Project Overview

Center for Studying Health System
Change
Wall Street Comes to Washington
June 18, 2003
Washington, DC
Bruce Gordon
Senior Vice President
Moody’s Investors Service
Moody’s Healthcare Rating Distribution Is
Skewed Toward Lower Ratings Than
Public Finance Ratings Overall
All Public Finance Ratings
•Excludes Credit Enhanced Ratings
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C
Ca
Caa3
Caa2
Caa1
B3
B2
B1
Ba3
Ba2
Ba1
Baa3
Baa2
Baa1
A3
A2
A1
Aa3
Aa2
Aa1
Health Care Ratings
Aaa
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Moody’s Not-For-Profit
Healthcare Outlook
“We believe not-for-profit hospitals will
maintain overall stable credit quality over
the course of 2003 . . . However, we also
expect the industry to face strong
pressure in 2004 and beyond . . .”
January 2003
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Factors Supporting Moody’s Stable Outlook
• Hospital utilization will continue to grow.
• Commercial rate reimbursement holding firm.
• Medicare reimbursement reasonable by historical standards.
• Hospitals adding new clinical services.
• Decline in M&A activity enhancing ratings.
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Industry Developments That Continue to
Pose Credit Risks
• Federal budget deficits could pressure Medicare
• State budget deficits already impacting Medicaid
• Commercial rate increases probably peaking
• Increase in operating expenses
• Large capital needs remain
• Stock market unpredictable
• Future bio-terrorism activity would increase
•
expenditures
Physicians and niche providers skimming cream
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Moody’s NFP Hospital Rating Changes
Number of Changes
80
60
40
20
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Upgrades
Downgrades
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Ratio of Downgrades to Upgrades:
Six Months 2002 and 2003
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2002
2003*
Ratio
*through 6/10/03
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Reasons for Downgrades
Strategic:






Mergers and acquisitions
Non-core operations
Construction-related dislocation
Capitation
Management/physician turnover
Merger dissolution
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Reasons for Downgrades
Local Market:







Large Medicaid and indigent mix
Nursing and other staff shortages
Unfavorable demographics
High governmental payer mix
Competition
High managed care payer mix
Union actions
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Reasons for Downgrades
Financial:





Malpractice expense
Pension expense/funding
Stock market losses
Incremental debt
A/R, contractual, collection problems
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Reasons for Upgrades
Improved reimbursement contracting (S) (F)
 Patient volume increases (S) (L)
 Increased market share (S) (L)
 Divestiture of unprofitable ops (S)
 Digestion of mergers (S)

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Reasons for Upgrades
Good demographics/pop. growth (L)
 Exclusive services/specialty provider (S)
 Sole community provider (L)
 Cost cutting initiatives (S)
 Acquisition by higher-rated entity (S)

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