A window of access to capital has opened for hospitals, according to Lisa Goldstein, because of the improvement in the debt markets seen over the past six to nine months. On June 23, 2010, at the Healthcare Financial Management Association’s ANI: The Healthcare Finance Conference in Las Vegas, Nevada, Goldstein presented “Navigating the 2010 Capital Market: A Rating Agency Perspective.” She is senior vice president of health-care ratings at Moody’s Investors Service, New York, New York.
In health-care finance, Goldstein says, access to capital has been a primary concern, and uncertainty has made agency ratings more important than ever. Cutting expenses to the bone in 2009 produced much of the improvement seen now in hospitals’ financial standing, but unpredictability reigns in health care in 2010, so the capital-access window might not remain open for long, and the pent-up demand for capital is considerable. Investment in IT, Goldstein adds, should be a priority for many hospitals because it will support efforts to improve throughput, enhance quality, and reduce expenses.
Moody’s, the only independent rating agency, has 11 analysts in four locations who perform bond ratings for 550 not-for-profit hospitals and systems (covering a total of 1,200 hospitals). The rated institutions range, in inpatient volume, from 2,000 to 400,000 admissions per year, and they have $150 billion in total rated debt. Every rating is reviewed annually, and 90% are of investment grade. Because ratings focus on future revenue, audits emphasize the stability of revenue sources and are particularly sensitive to any decline in top-line revenue.
Moody’s Investors Service’s outlook on the health-care industry changed from stable to negative in November 2008, and it remains there. Goldstein attributes this position to the sluggish economic recovery, to a widening of the gap between high- and low-performance hospitals, and to the heavy dependence of not-for-profit hospitals on government funding. Increased scrutiny of tax-exempt status and uncertainty concerning regulatory changes are other negative influences, she says.
Not-for-profit hospitals get a median of 42% of their funding from Medicare; cuts are coming, and the Medicare trust could become insolvent within eight years. An additional 11% of funding comes from Medicaid, which is affected by states’ budget problems and by the expiration of stimulus programs. Commercial insurers, hit hard by reform, will increase revenue pressure through tougher negotiations with hospitals.
Overall, the industry is volatile. Rating downgrades will once again outpace upgrades in coming years, Goldstein predicts, continuing a pattern exhibited in all but four of the past 20 years.
At Moody’s, Goldstein says, the importance of liquidity was the biggest lesson learned through the recession. The credit crisis proved that having a great deal of cash doesn’t equal having adequate access to cash. The distinction between wealth and liquidity is important because a system that cannot liquidate investments might be unable to meet its cash obligations, even if it has great wealth, and this can force it to make highly unfavorable arrangements to meet immediate needs.
For this reason, Moody’s is now collecting liquidity data that allow consistent comparisons and the establishment of medians. This enhanced analysis of hospitals’ investment allocation reviews asset classes and manager types, manager diversification, frequency of valuations (especially for hedge funds), degree of nonliquid investment, and investment philosophy.
Because common accounting measures can’t always indicate liquidity, Goldstein says, Moody’s is expanding its key measurements to include the cash that a hospital could make available within a month and within a year. In a crisis, she adds, a hospital should be able to come up with cash within a month; some systems have used investment strategies that make it impossible for them to get access to their cash quickly (and, in one case, a system could get only half of its cash within two years).
In this arena, a higher bond rating can work against a hospital by allowing it to invest more aggressively using private equity, venture capital, and other low-liquidity mechanisms. Most institutions are in better shape, however, and the 160 hospitals and systems that have submitted their liquidity data to Moody’s so far are showing good monthly cash days on