Many of our rated health care providers receive more than 50% of annual revenue from Medicare, which is funded by the federal government, and from Medicaid, which is jointly funded by the federal gov- ernment and the states. Our view of the fiscal stress that has contributed to the lowered rating on the U.S. and a few U.S. states, along with reimbursement cuts already planned as part of the recently passed Patient Protection and Affordable Care Act (PPACA), plays a large role in our assessment of growing reimbursement risk (see “Outlook Is Stable For Not-For- Profit Health Care Providers This Year, But Unsettling Times Loom,” published Jan. 26, 2011, on RatingsDirect, on the Global Rating Portal).
Despite the large portion of revenue derived from government programs, we do not view the credit rating of the governments that are the source of those revenues, including state general obligation bond ratings or the U.S. sovereign rating, as limiting factors for hospital ratings. However, pur- suant to our criteria, we consider the fiscal condition and fiscal policies of governments providing reimbursement to hospitals as part of our ratings analysis. Our view of the relatively high level of reimbursement and regu- latory risk in the health care sector is a component of what we see as the sector’s industry risk. As a result of our view of industry risk, we have not assigned any unenhanced ‘AAA’ rat- ings in the sector to date. In addition, we have just five ‘AA+’ ratings at this time, among approximately 560 not- for-profit acute care credits.
Hospitals derive revenue from Medicare and Medicaid for services pro- vided to patients, for whom they are paid fees that are set by Medicare and Medicaid, and which are not subject to negotiation by the hospitals. A factor in our assessment of hospital credit is the adequacy of reimbursement, which depends on both the level of reimburse- ment and the hospital’s cost structure. In our opinion, hospitals and health sys- tems have recently performed well in managing their costs in the face of sev- eral industry-wide challenges, including
continued growth in bad debt and charity care, flat-to-declining patient vol- umes, the rising cost of physician inte- gration strategies, and slowing reim- bursement from both private commercial and governmental payors. Management teams’ diligence in managing costs and limiting capital expenditures, as well as reduced new debt issuance and a rebound in investment markets from 2009’s low, have, in our view, all con- tributed to stable credit quality in the U.S. not-for-profit health care sector.
The 2010 passage of the PPACA increased the long-term risk we foresee about the future adequacy of health care reimbursement, although, according to our calculations, the risk is minimal until federal fiscal-year 2014. However, in our view, the recent package increasing the U.S. debt limit and the general fiscal con- dition of the U.S which contributed to the recent downgrade highlight future poten- tial reimbursement risk beyond what was already in the PPACA. The impact on not-for-profit health care credit ratings, if any, will depend on our assessment of the depth of future reimbursement cuts to providers and the ability of hospitals to react to those changes.
In our view, many not-for-profit hos- pitals and health systems retain signifi- cant credit strengths including, in many cases, very strong balance sheets and business positions, and some will be able to weather reduced reimburse- ment, should it occur, while still retaining strong credit profiles. However, we believe that those with already-thin operating margins, inflex- ible cost structures, and high depend- ence on governmental payers are more likely to experience credit stress over the next few years. CW
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Liz Sweeney New York (1) 212-438-2102
Cynthia Keller Macdonald New York (1) 212-438-2035
Martin D. Arrick New York (1) 212-438-7963
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