Column: Study gives look at not-for-profit health care municipal credit

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Carson-Tahoe Hospital conducted affiliation discussions at their strategic planning session Wednesday evening.

Some of the topics discussed involved the issuance and maintenance of debt by either CTH or its possible partner.

After the meeting, I did some homework and found a detailed study conducted by Moody's Investors Service on the 2000 outlook for not-for-profit health care municipal credit. The study was published in August, so it is relatively current. Moody's municipal credit research department is one of the most respected and impartial municipal bond evaluators in the country.

Moody's rates more than 500 not-for-profit hospitals and health care systems with approximately $72 billion in total debt outstanding. While the average rating remains at A3, it has slowly begun to approach the Baa1 level, reflecting the heavy downgrade activity over the past 30 months.

Moody's believes that U. S. not-for-profit hospitals will continue to face a deteriorating credit environment.

The financial performance for U.S. not-for profit hospitals and health care system deteriorated in 1999 and is expected to continue through 2000 and likely into 2001. Audited 1999 and interim 2000 financial statements show continued earnings compression and balance sheet stress.

Likewise, rating activity in 2000 appears to mirror the high level of rating activity experienced in 1998 - 1999 through August 2000 downgrades exceed upgrades 38 to 2. A credit downgrade is "deadly" to a hospital in that it will force hospitals to issue bonds at a higher coupon or interest rate. This will in effect cost the hospital more money to borrow, thus worsening its balance sheet.

The majority of the rating downgrades in 2000 have been in the A or higher rating categories, evidencing the fact that the current industry challenges do not discriminate by rating category. Carson -Tahoe Hospital currently carries that coveted A rating by Moody's. Currently, 97 ratings carry negative outlooks as compared to 42 with positive outlooks, contributing to Moody's negative outlook for the sector.

One of the biggest contributors to Moody's negative outlook is the continued integration difficulties for providers following their recent mergers as they begin to consolidate systems and clinical services. This is something CTH should seriously consider prior to affiliating.

Moody's believes horizontal integration strategies, whether mergers, acquisition or other types of combinations are likely more successful; if the delegation of roles and strategic initiatives are agreed upon and well thought out prior to the combination.

One of the two rating upgrades during the fist half of 2000 reflected a successful merger, as Summit Medical Center was merged into Sutter Health, a large regional provider in Southern California, and one of the firms interested in CTH.

Another contributor to the negative outlook is the niche providers or specialty hospitals which are beginning to populate growing areas with lucrative services such as open-heart surgery, orthopedics and low-cost ambulatory surgery. Thus leaving the community hospital with less profitable services and a more stressed balance sheet.

A third negative contributor to Moody's outlook is that more health systems are engaging in joint ventures with specialty physician groups to keep some income from the services within their systems.

Even absent the encroachment of a specialty hospital, declining reimbursement to physicians is increasing the competitive landscape between hospital providers and physicians forcing hospitals to share net income for various services rather than risk losing all or a majority of revenues to a physician group or practice.

Other negative contributors to Moody's outlook are continued pressure from both commercial and governmental payers; declining liquidity and higher leverage brought on by funding capital needs; a national nursing shortage; and rising pharmaceutical costs.

While national trends are evident, Moody's believes health care continues to be a local phenomenon, which drives various strategic decisions. Virginia, the state I grew up in, is actually benefiting from a strong economy and has a relatively low penetration of managed care statewide.

California, on the other hand, continues to grapple with extreme labor issues, very low HMO premiums, and large, independent, well-organized physician groups that have passed capitation risk on to many of the providers.

Unfortunately, Moody's did not discuss my home state of Nevada in its report, but did mention Washoe Medical Center as having a stable outlook with an A2 rating. In spite of these challenges, Moody's believes there are hints of rating stability. This only means less downgrade activity as opposed to increased upgrade activity.

Finally, I uncovered a very interesting conclusion. The 2000 medians show a strong correlation between larger size facilities and higher ratings, and they continue to believe that larger entities, especially those operating in multiple sites, tend to possess greater resources to withstand industry pressures.

Unfortunately, they also concluded larger size does not ensure profitability. The largest 50 providers are showing a loss from operations as opposed to a gain for the smallest 50 providers in the Moody's study.

For information, call Bill Creekbaum, CFP at 689-8720 or e-mail me at

William Creekbaum, MBA, CFP, a Carson City resident, is senior consulting group associate of Salomon Smith Barney, a financial services firm serving Northern Nevada.


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