Healthcare Industry Is Sick; Financials Likely To Worsen This Year

The healthcare industry is sick – really sick, according to Moody’s Investors Service, which downgraded a record $20 billion of U.S. not-for-profit healthcare debt in 2012.

The situation stands to only get worse as pressures mount to reduce Medicaid and Medicare costs, which are among the largest sources of revenue for hospitals. As pointed out by Moody’s, Medicare funding is the largest single revenue source for most not-for-profit hospitals, and it is a main target of federal deficit reduction plans. Medicare is the federal program for people 65 and older, and those younger with qualifying disabilities.

Then there is Medicaid, which is the federally funded program for low-income people. Administered by the states, its revenues are also under pressure. For some states, its costs can eat up as much as 25% of their budgets, and it can even be the largest cost for others.

Obamacare expands the program and provides somewhat of a safety net for hospitals that provide care for those without insurance and cannot pay their bills. Prior to the healthcare reform law, many hospitals had complained that they were left stuck with the bill for those who could not pay, so Obamacare was seen as a positive. However, states can opt out of the expanded the program, which essentially puts hospitals back at square one.

These kinds of concerns were among those noted by Moody’s, whose 2012 downgrades represented a whopping 213% increase from the $6.4 billion it downgraded in 2011. Even more telling about the state of the industry is that this was the highest amount of downgraded debt in one year in the sector since the rating agency began tracking the metric in 1995.

The downgrades largely stemmed from volume declines and weaker or negative revenue growth, which resulted in weakening operating performance and debt service coverage, according to Moody’s analyst Carrie Sheffield.

“The downgrades were also driven by declines in liquidity, more competition, increased debt load, and many hospitals faced management and governance issues and pressures on pension funding,” Sheffield said in the ratings report released Monday.

As far as the health systems that accounted for the largest amount of downgraded debt, Moody’s named three. They were Catholic Health Initiatives in Colorado, Dignity Health in California, and New York‘s Memorial Sloan-Kettering Cancer Center. They made up almost $13 billion of the $20 billion.

The rating agency noted that downgrades are likely to increase this year. A saving grace for some hospital systems could be merging with other systems. The risk with that, however, is that it could cause credit deterioration.

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