Despite a strong economy and low levels of uninsured Americans, credit pressures led to more credit downgrades for nonprofit hospitals in 2017, Moody’s Investors Service said in a new report.
Moody’s said there were 41 downgrades in 2017 compared to 32 in 2016. Also, there were only 12 upgrades in 2017 compared to 21 the previous year. The downgrade-to-upgrade ratio of 3.4 to 1 was twice the level of 2016.
In December, Moody’s revised its revision of the nonprofit hospital sector from stable to negative.
Looking back at rating activity over the past 10 years, Moody’s said the 2017 ratio of downgrades-to-upgrades exceeded years in the recession.
Moody’s listed a number of pressures affecting nonprofit hospitals, including nursing shortages, volume changes and reimbursement pressures. Volume declines and variable rate debt risks were also a factor in the downgrades in 2017. Most notably, Medicare and Medicaid reimbursement changes caused financial issues for nonprofit health systems.
About 60% of hospital revenue comes from government payers. When Medicare and Medicaid drop reimbursement rates, nonprofit hospitals have trouble making up the difference. In the past, hospitals may have made up a portion of public payer reimbursement losses by getting better private payer reimbursements, but private payers have increasingly turned to growth strategies that Moody’s said in a recent report are threatening nonprofit hospital margins and volumes.
Moody’s said rising labor and supply costs coupled with lower revenue will continue to affect nonprofit hospitals this year.
Over the past two years, as payers pushed members to get more care at free-standing imaging and urgent care centers rather than hospitals, providers experienced flat patient volumes. Moody’s said that issue was common in many of the 41 credit downgrades in 2017.
Downgrades were more common at smaller systems. Nearly 60% of the downgrades were for hospitals and health systems with less than $1 billion in operating venue. Moody’s especially pointed to downgrades in the Rust Belt, including Ohio and Pennsylvania. The issues with the Rust Belt concerned a “lagging economy, aging demographics, a difficult commercial payer environment and competitive service areas. We expect this region's credit pressures to continue,” Moody’s said.
However, it’s not just areas with lagging economies that have struggling nonprofit hospitals. Moody’s also found that Georgia, which is a high-growth state, saw four providers downgraded. Three of those downgrades happened at rural healthcare facilities. Rural healthcare has additional challenges, including nurse and physician shortages, rising uninsured and Medicaid populations and highly-concentrated payers, Moody’s said. Moody’s expects rural healthcare facilities will continue to face similar issues this year.
Though Moody’s warned of the downgrade trend, the report also highlighted bright spots in nonprofit healthcare. Systems that saw an upgrade improved their financial performance, debt service coverage and liquidity. Plus, mergers played a role in some of the upgrades. Moody’s said synergies and efficiencies after a merger can lead to upgrades. However, Moody’s warned mergers aren't always beneficial and can lead to downgrades depending on acquisition strategies.
Despite the nonprofit hospital sector’s overall negative outlook, Moody’s said about 85% of nonprofit and public healthcare ratings were affirmed in 2017. “Most providers are able to navigate through the ups and downs of business cycles and have the liquidity buffer to do so,” Moody’s said.
Though Moody’s voiced credit concerns for nonprofit hospitals, recent nonprofit financial reports show mostly positive results, including: