In This Issue: U.S. Not-For-Profit Health Care Rating Trends Seen Stable Despite Pressures: The same forces that drove improved performance for so many credits beginning in 2004 contributed to the favorable performance trends and rating stability in 2006, and should continue in 2007 and 2008. Standard & Poor's also has a reasonable expectation that 2008 will demonstrate generally stable credit trends, despite rising legislative risk and incremental sector pressure.Why U.S. Not-For-Profit And For-Profit Health Care Credit Quality Differ: Standard & Poor's believes the not-for-profit and for-profit hospital sectors differ significantly in many key business and financial components of ratings analysis, despite operating in the same business. This is an important reason why the credit outlook in 2007, for U.S. not-for-profit hospitals and health systems is looking hale and hearty and the for-profit sector could soon be heading to the emergency room. The not-for-profits' inherent advantages, given their tax-exempt status and related balance sheet strength, ability to fundraise and garner other community support, and lack of equity investors, play a considerable role in their far superior (generally investment-grade) ratings distribution than that of the for-profit sector. In contrast, the credit outlook for rated for-profit hospitals in 2007 is far worse due to the investor influence in financial policy that has resulted in a large degradation in financial profiles. The Credit Gap Between U.S. Not-For-Profit Health Care's Haves And Have Nots Continues To Widen: Standard & Poor's expects to see a continued widening of the credit gap between the top and bottom performers in the U.S. nonprofit acute-care sector over the next few years. This disparity between health care's "haves" and "have nots" has been on our radar for some time now, with recent and current trends suggesting it will continue to increase. The ability of the larger systems and strong single-site hospitals to use their business position to gain adequate reimbursement increases in the face of payor consolidation and decelerating health insurance premium increases is another contributing factor, as is the changing nature of physician relations and the need to counteract competition with medical staff. Also adding to the likelihood of an increasing credit disparity is the continued growth in bad debt and charity care levels, which disproportionately affects health care's "have nots." What's Ailing New Jersey's Not-For-Profit Hospitals: The Reasons Why They Lag The Strong
National Credit Trend: Despite the generally favorable credit trends experienced by not-for-profit acute-care hospitals nationwide, New Jersey's acute-care hospitals, by and large, lag national averages on many credit measures and have an overall weaker ratings profile. During the past several years, New Jersey's hospitals have experienced a host of challenges. Not-For-Profit Health Care Providers' Increased Use Of Derivatives Offers Benefits And Risks: The U.S. not-for-profit health care sector has seen an increase in capital spending in response to changes in technology and patient-care delivery during the past several years. It has also experienced the pressures of a competitive landscape shaped by the increasing consumer choices of savvy patients. These factors have led the sector to an increased use of derivatives in order to raise capital and minimize risk. For this report, Standard & Poor's analyzed the credit impact of interest rate swaps employed by not-for-profit health care providers. Debt service remains a large expense item for health care providers and to minimize cost and mitigate cash flow and interest rate risk, many health care credits have entered into derivative trades. Evolving Physicians Relations Continue To Affect U.S. Not-For-Profit Health Care Credit: Physicians have always been a credit factor for the rated universe of the Standard & Poor's 650 nonprofit acute care hospitals and hospital systems in the U.S. However, as the health care industry has evolved, it has brought changes in physician behavior, incentives, and compensation. Accordingly, we have adapted our analysis to reflect the new and different ways that physicians are interacting with health care organizations. In general, physician relations have become significantly more complex, and hospitals face greater risk of losing patient volumes due to shifting physician loyalties or competition from doctors performing services in their offices, outpatient centers, and physician-owned inpatient facilities. Hospitals have reacted to the increased complexity in a variety of ways, including employing more physicians, shifting to an employed clinic model and forming joint ventures with physicians. |
