Healthcare sector's future stability remains uncertain - In the News - Statistical Data Included

Healthcare Financial Management, Nov, 2001

The not-for-profit healthcare sector is beginning to emerge from the rapid financial decline of the late 1990s, according to Standard and Poor's, New York, New York. Median ratios in 2001 show financial stability and, in some ratios, measurable improvement, after declines since 1997. The medium- to long-term outlook, however, remains clouded, because cost pressures, potential revenue constraints, and an uncertain stock market could affect performance over the next couple of years.

In addition, this year's unaudited, current-year, interim results generally are improved over last year's results. Balance-sheet ratios also are showing small, but consistent, improvement, especially liquidity levels, though the positive momentum in liquidity may not last given the weak showing in the stock market this year.

Standard and Poor's also found that healthcare median ratios showed small, but clear, improvement in 2001 for a wide range of financial indicators, especially in the upper rating categories. This improvement and, in the case of 'BBB' category credits, stabilized financial results reflect an easing of revenue pressures and a renewed focus on core business strategies, even though underlying cost pressures remain locally intense. Unaudited financial results for the current year continue to demonstrate improved financial performance.

The major drivers behind the financial improvement include more generous Federal payment policies, increased rates paid by health plans, success in limiting physician practice losses, divestiture of unprofitable subsidiaries, the unwinding of failed integration strategies, a renewed focus on basic operations, and, for many, growing patient volumes.

Despite the healthcare sector's financial improvement, downgrades outpaced upgrades. There were 59 downgrades and only eight upgrades from January 1, 2001, through September 4, 2001. Similarly, there were 62 downgrades and only 12 upgrades in 1999 and 2000. Standard and Poor's made 29 changes in outlook, a one- to three-year forward-looking assessment, in 2001, of which 15 were positive and 14 negative. The majority of the positive-outlook changes marked a return to stable from negative for rated organizations that demonstrated enough improvement to avoid a downgrade or the elimination of a negative CreditWatch listing without a downgrade, according to Standard and Poor's. In contrast, 75 percent of outlook changes in 2000 were negative.

Several factors are driving continued downgrades and rating affirmations, while limiting upgrades. During the late 1990s, the number of negative outlooks assigned in the healthcare sector by Standard and Poor's was far above historic levels. In many cases, these entities have not regained enough of their former financial profile, especially on their balance sheets, to retain their rating and are being downgraded now. Also, many providers that had shown improved performance are using their enhanced financial profile to issue additional debt, thereby maintaining their current rating instead of being upgraded. Similarly, some providers' need for additional capital outstrips their debt capacity at a given rating, causing their rating to drop.

Cost pressures, such as rising wage rates, critical labor shortages, and rising pharmaceutical and implantable-device prices, remain strong and are a threat to future performance. Capacity constraints driven by labor shortages or plant limitations also have hurt performance in select cases. The stock market decline also contributed to weaker financial performance. Reduced investment income has been only somewhat offset by improved operating performance, according to Standard and Poor's.

Similarly, Fitch, another rating company based in New York City, issued more downgrades than upgrades for the nine months ended September 30, 2001. The hospital sector accounted for 11 of the 13 downgrades issued by Fitch's Health Care Group, while the nonacute care sector (nursing homes and continuing care retirement communities) accounted for two downgrades. In addition, the group assigned new ratings on 40 issues, affirmed 34 ratings, and placed nine entities on rating watch. There were two upgrades during this time. Fitch rates 235 healthcare entities, including hospitals, health systems, long-term care facilities, and related healthcare entities. New borrowings totaled $4.8 billion.

HHS BEEFS UP RESOURCES TO FIGHT TERRORISM

HHS Secretary Tommy G. Thompson is the first HHS secretary to declare a national medical emergency, which he did after the September 11 terrorist attacks in New York City and Washington, D.C. He has put the Office of Emergency Preparedness in Rockville, Maryland, and experts at the Centers for Disease Control and Prevention in Atlanta, Georgia, on duty 24 hours a day, seven days a week, the Washington Post reported.

Thompson has met every day since September 11 with his newly formed bioterrorism team, composed of Federal employees and private consultants brought in to refine the government's plans to detect and respond to a biological or chemical assault. The team has helped negotiate an accelerated contract with the maker of a smallpox vaccine and identified healthcare specialists across the United States who could be tapped in the event of a biological attack, according to the report.