Moody's Investors Service could be on the cusp of changing its longstanding negative outlook for the not-for-profit hospital sector, but the rating agency said the sector remains under some duress. The New York-based ratings agency has issued negative outlooks for the non-profit hospital sector since 2008.
In the meantime, if you're looking for gilt-edged bond investments where repayment is guaranteed, turn to the states of Texas, Georgia and Utah, or Harvard University. Don't look for them in the hospital sector.
That's the observation of Lisa Goldstein, associate managing director for Moody's Investor's Service, who spoke at the Healthcare Financial Management Association Annual National Institute in Orlando, Florida, last week. Moody's issues ratings for about 16,000 institutions nationwide, including governments, universities and hospitals. About 10 percent of those are AAA, the highest score. But the 400-odd nonprofit hospitals and healthcare systems rated by Moody's--which range from multi-billion dollar systems to critical access hospitals--never receive them.
"When Congress controls about half of your revenue stream (Medicare) with the stroke of a pen, it is never going to be a gilt-edge investment," she said.
Only one provider has the second-highest rating of AA--Intermountain Health Care in Utah. Two other systems have held that rating, but they were eventually downgraded, according to Goldstein.
The average provider in the Moody's portfolio is a 300-bed standalone community hospital with revenue of about $500 million a year. Goldstein said that's a reflection of the fact the sector is yet to fully consolidate, although the ratings agency issued a report last week concluding that mergers and acquisitions are expected to accelerate.
As a result, most of their ratings fall somewhere in the middle of the scale. Another 10 percent are below investor grade. Smaller hospitals tend to receive that rating, but there have been larger systems in that spectrum in the past.
In the for-profit world, the large majority of debt for big systems such as Tenet and HCA are below investment grade. "They're very profitable, but they're very leveraged," Goldstein said.
And while 2005 was the last year the not-for-profit hospital world had more upgrades than downgrades--and there have only been four such years in the past decade --the trend has been fairly positive for hospitals as of late, according to Goldstein. The passing of the Great Recession has transitioned to a "relatively steady" period where 85 percent of ratings are affirmed year after year. "Affirmations are very high, and speak to the overall stability of the capital markets," she said. Operating margins are down slightly the past year, but operating cash flow --that's operating income plus depreciation and interest--has been steady. But days cash on hand and cash to debt have been improving.
Revenues also are up, while expense growth has been down, which Goldstein credited to extensive cost-reduction strategies, along with new revenue coming in from Medicaid expansion and other facets of the Affordable Care Act (ACA). The agency said in a recent report that the ACA has helped drive down bad debt for hospitals.
For the next couple of years, Goldstein predicts modest growth in the sector, based on the forecast modeling Moody's has put into place. That appears to be a modest change from a report issued last year, which predicted constricted revenue growth. The agency's long-term outlook remains negative, although that could change.
"Stayed tuned on that front," Goldstein said, adding that sustained revenue growth of 1 percent to 3 percent a year could trigger an outlook change from negative to stable.