Finances
Economy Takes a Toll on Hospitals; Credit Ratings Continue to SlideExpert advice: Improve physician relations, shore up investments
While many health networks across the country were headed to critical care this summer, BayCare Health System must have been happy to have its financial condition listed as “stable.”
In September, Fitch Ratings affirmed the Tampa, Fla., network’s AA- rating on about $730 million of outstanding bonds, while giving BayCare a stable ratings outlook. Fitch believes that BayCare “will continue to benefit from its strong market position … which, in turn, will enable the health system to make the capital improvements necessary to remain competitive.”
BayCare’s credit stability was an exception in 2008, a year in which downgrades exceeded upgrades by a 2-to-1 ratio for not-for-profit health care systems, according to a report issued in August by Standard & Poor’s Ratings Services.
The S&P report and several others issued this summer painted a gloomy enough picture of hospitals’ credit worthiness and investment earnings. But as the nation’s economic convulsions intensified this autumn, the reports looked positively rosy compared with what end-of-year and 2009 analyses are likely to bring.
The annual Commonfund Benchmarks Study of investment performance showed a significant drop in total returns for not-for-profit portfolio managers in FY2007, and the next report will likely be much worse, warned John S. Griswold, executive director of Commonfund Institute. “Last year was a much more benign environment than this year will be,” Griswold says.
The causes for all of the anxiety are familiar to health network executives: inflation, sluggish growth in reimbursement rates (especially among commercial payers) and shrinking state budgets that may affect Medicaid. Even a slight reduction in the number of uninsured Americans was overshadowed by the expectation that increases in co-pays and deductibles will lead to rising bad debt. “As the economy falters, employers look for more ways to cut costs, which often means less health benefits,” says Jeff Schaub, senior director of public finance for Fitch.
Despite all this unease, health care administrators can take steps to strengthen their position with the credit rating systems. Experts we interviewed offered a few:
- Pay careful attention to day-to-day business. “There are new sources of revenue to be found and new savings to be found,” Schaub suggests.
- Look beyond the current crisis and re-examine investment strategies. Major health networks are bolstering investment returns by shifting their allocations from equities to hedge funds, natural resources, commodities and other long-term investment strategies. “If you’re going to preserve long-term viability of your hospital you’re going to have to have long-term strategies,” Griswold says.
- Shore up physician relations. “Most of the downgrades we did were because of declining profitability,” Schaub says, “and much of that can be tied to physician relations.” Health care networks that pay attention to a wide range of recruitment and retention strategies, from working hours to billing conveniences, have been the most successful.
But the best hospital financial plans may not be enough for smaller, stand-alone hospitals, which lack the market share and physical assets to remain competitive. For some of these, 2009 may be the year they follow the long-term trend and find refuge with a larger partner.
“We do have some strong hospitals at the lower end of the sector,” says Schaub, “[but] we’re going to see increasing consolidations. As the smaller hospitals look around and see they don’t have the ability to compete, they’ll be looking for partners that can help them cement a competitive position in an increasingly competitive market.”
This article 1st appeared in the November 2008 issue of HHN Magazine.
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