Moody's nonprofit health-care downgrades more than triple in 2012

By Angela McDaniels

Tacoma, Wash., Feb. 12 - Moody's Investors Service said it downgraded a record $20 billion of U.S. nonprofit health-care debt in 2012, an increase of 213% from the $6.4 billion downgraded in 2011 and the highest amount of downgraded debt in one year in the sector since the agency began tracking the metric in 1995.

The $20 billion of downgraded debt was more than double the year's $9.7 billion of upgraded debt, according to the rating agency report.

"The downgrades in 2012 were driven by volume declines and weaker or negative revenue growth contributing to weakening operating performance and debt service coverage," Moody's associate analyst Carrie Sheffield said in the report. "The downgrades were also driven by declines in liquidity, more competition, increased debt load, and many hospitals faced management and governance issues and pressures on pension funding."

Three large health systems were responsible for the majority of the downgraded debt. The agency said Catholic Health Initiatives in Colorado, Dignity Health in California and New York's Memorial Sloan-Kettering Cancer Center made up nearly $13 billion of the $20 billion downgraded.

Even so, Moody's said the increase in the absolute level of downgraded debt in nonprofit health care tracks to the reported $311 billion of public debt downgraded in 2012 across all of the agency's public finance sectors, compared with $24 billion of debt upgraded. In the agency's view, it reflects providers' continued struggle to maintain margins as tepid economic growth contributes to slow revenue and lackluster volume growth.

"The industry remains under pressure from policymakers and the public to reduce costs," Sheffield said. "Medicare funding, the largest single revenue source for most not-for-profit hospitals, is a main target of federal deficit reduction plans."

Upgrades also increase

Rating activity for the nonprofit health-care sector in 2012 marked the seventh consecutive year in which downgrades (40) outpaced upgrades (38) for a ratio of 1.05 to 1.

The 38 upgrades also represent an increase over 2011's 23 upward rating revisions.

"Rather than coming from fundamental credit improvement, many of the upgrades were due to consolidation as the debt of a lower-rated hospital was guaranteed by a higher-rated system upon merging," Sheffield said. "Downgrades are likely to increase in 2013, but consolidation may serve as an important check on the trend even though it sometimes causes credit deterioration."

In addition to merger activity, Moody's reported that the increased number of upgrades in 2012 was due to favorable stock market returns of recent years and interest rates that have allowed many hospitals to refinance or issue new debt at historically low costs.

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