Economy affects hospital ratings - Bucks County, PA

At least two local hospitals had their bond credit ratings recently lowered or threatened, a troubling but not unexpected situation facing the nonprofit health care industry, one health care analyst said.

The ratings are a critical credential for borrowing money.

Hospital officials say the lingering economic recession continues to affect their traditionally razor thin operating margins with investment income and lucrative elective procedures revenues down and charity care and bad debt climbing with rising unemployment rates.

This month, Moody's Investor Service placed the financially troubled Lower Bucks Hospital in Bristol Township on its watch list for possible credit downgrade, which would put the hospital near the bottom of the rating scale.

The more than $25 million in bonds issued by Langhorne Manor Higher Education and Health Authority are currently rated at B3, considered a highly speculative investment, meaning deteriorating situation expected.

The next step down is a Caa rating, which Moody's considers "high likelihood of bankruptcy or other business interruption."

Moody's warning is based on unaudited 10-month financial statements ending April 30, which showed continued decline in financial performance. A decision on a possible downgrade could occur in 90 days.

Earlier this year, another major credit rating service, Standard & Poor's, downgraded the rating from BBB+ to BBB on Doylestown Hospital Authority's bonds issued to Doylestown Hospital, citing its failure to meet operating expectations in fiscal 2008 and the first part of fiscal 2009.

BBB+ and BBB ratings are considered "medium safe investment" and often occur when the economy has deteriorated, according to S & P.

The downgrade was the second for Doylestown since 2008, when the rating dropped from A- (considered a safe investment) to BBB+. Additional debt and a financial profile inconsistent with an 'A' category rating were the reasons.

Since then, operating income expectations had not been met, which contributed to the inability to improve liquidity as expected. Liquidity has fallen due to low operating cash flow and negative returns in the investment markets.

S&P also noted that Doylestown has enough financial cushion and market strength to manage the improvement initiative necessary to restore a modest operating margin.

How many other hospitals have experienced credit downgrades or threats is unclear. The Hospital and Healthsystem Association of Pennsylvania, an industry trade group, doesn't track bond ratings of its members, spokesman Roger Baumgarten said.

But Moody's and S&P predicted a continuing upward trend among credit downgrades this year and continued struggles to sell bonds at attractive prices.

In January, Standard & Poor's predicted credit downgrades among nonprofit health care providers would substantially exceed upgrades. It cited weak investment performance, decreased patient volumes, state budget crunches and recession-related pressures on expenses and uncompensated care.

Moody's downgraded nearly twice as many nonprofit hospitals compared with the number that received credit upgrades, highest since 2001. Moody's also reported that 10 hospitals were being monitored for downgrades at the end of 2008, versus two at the close of 2007.

Lower Bucks Hospital spokesman John Coffman said the downgrade threat wasn't entirely unexpected given the recent financial problems.

The hospital has been operating in the red for at least four years. In fiscal year 2005-06, the hospital had a $4.3 million deficit. In 2006-07, the deficit was $2.2 million.

The employee pension fund was frozen as of June 30, and hospital officials have asked the federal Pension Benefit Guaranty Corp. to take over management of the fund. The pension plan is one of the 183-bed Bristol Township hospital's major debts and is estimated at $50 million.

"It puts all bondholders on the edge of their seats," Coffman said, adding the hospital is not borrowing money at this point and its bills are up to date, Coffman said.

Doylestown Hospital chief financial officer Dan Upton says the hospital's investment portfolio has declined in value 20 percent in the last year, which has been a big financial blow.

The hospital maintains a profitable financial position, though not as high as anticipated, he said. While patient volumes are up, they are below projected levels, though since the credit rating was lowered in March, the hospital's financial outlook has improved.

The credit downgrades do not affect the hospital's ability to borrow money or change current interest rates, Upton said. He added it's unlikely the hospital will borrow money because it doesn't want to over-leverage itself.

The credit downgrades are troubling but not necessarily worrisome, said Philadelphia health care strategist Craig Holm, senior vice president of Health Care Strategies & Solutions, a leading industry analyst.

Most nonprofit hospitals historically operate on profit margins in the low, single digits, Holm said. With the added number of uninsured and underinsured patients and a decline in elective surgeries, the margins are getting even tighter.

Holm predicted that Doylestown and Lower Bucks hospitals won't be the only local hospitals facing deeper scrutiny by credit rating agencies.

"We'll probably see more," he added.

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