How Will Quality Metrics Impact a Hospital’s Credit Rating?

Which ratings matter most to hospitals?

The article below is reprinted with permission from The Capital Issue, a quarterly newsletter published by Lancaster Pollard.

The number of groups evaluating and awarding top grades to healthcare organizations is growing. Consumers can pick from the government’s website Medicare Hospital Compare or a handful of assessments from private and nonprofit organizations, such as U.S. News and World Report, Consumer Reports, Truven Health Analytics and the Joint Commission, among others. Hospital ratings vary widely as each rater uses a different methodology that can provide vastly different results. 

As the Patient Protection and Affordable Care Act’s provisions are implemented, quality metrics will become a bigger agenda item in a hospital’s board room. Medicare’s quality incentive program has sent a large signal to other insurers and the healthcare industry at large with its risk-based contracts to achieve quality and cost targets via incentives, or in some cases, financial penalties. Additionally, both payers and purchasers have stepped up their demand for high-value healthcare with the start of mandated insurance changes this year. Those agencies and organizations that rate hospital performance are paying particular attention to the sea change and currently are determining how to incorporate quality measurements into their methodologies.

Evolving credit ratings
In the near future, quality measures could impact a hospital’s cost of capital as healthcare reform focuses on transitioning from a fee-for-service to a fee-for-value model, with hospitals expected to take on risk and deliver measurable quality of care. From a capital markets perspective, the ability to access capital at low rates and competitive terms often depends on the evaluation that matters most to investors — the investment grade rating assigned to the bond issue by one of three credit rating agencies. The group, often dubbed the Big Three, consists of Moody’s Investors Service, Fitch Ratings and Standard & Poor’s.

Traditionally, each CRA has its own criteria and methodology, with varying degrees of transparency, to determine a hospital’s credit rating. Key quantitative categories include credit profile ratios for liquidity, profitability and capital structure. Qualitative (nonquantifiable information) factors, such as the economy, local market demographics, competition and the strength of a hospital’s management and board, also impact an organization’s credit assessment. (Suggested Read: “Making the Grade: Choosing the Right Rating Agency.”)

However, CRAs are in the process of determining what quality indicators matter going forward, particularly in regards to Medicare’s evolving incentive programs, and how to apply those metrics in their evaluations.

Adding quality to the mix
Medicare’s inpatient quality incentive program, known as Hospital Value-Based Purchasing, is part of the Centers for Medicare & Medicaid Services’ three-prong effort to use Medicare’s payment system to improve clinical outcomes, patient safety and experience. VBP uses the hospital quality data reporting system, previously developed for the Hospital Inpatient Quality Reporting program, to assess quality based on peer comparison and year-over-year improvement through value-based quality incentives. Additionally, Medicare’s Hospital Readmissions Reduction Program and Hospital Acquired Conditions Penalties work alongside HVBP to further drive clinical outcomes, patient safety and patient experience.

For about half of those hospitals participating in the HVBP program the financial impact is negligible, according to Kaiser Health News and NPR. These organizations are gaining or losing less than a fifth of one percent of what Medicare otherwise would have paid. Others are experiencing greater spreads. Overall, more hospitals were penalized. Last October, CMS raised payment rates for 1,231 hospitals while reducing payments for 1,451 hospitals, with the average penalty greater than the previous year. It is important to note that critical access and certain specialty hospitals are exempt from the VBP program.

As mentioned, the amount of reimbursement at risk currently is small; however, the combined penalties of all three Medicare quality programs could add up to as much as 5.5 percent for providers that do not toe the line. It’s very apparent that CMS is indicating to the marketplace that quality is important and other payers will follow Medicare’s lead. Therefore, it should be expected that investors will begin incorporating quality indicators into their evaluation processes. 

Erik Carlson, a healthcare management expert based near Omaha, Neb., believes a value-based system will be adopted in due course. “Quality will increasingly drive decision-making in the healthcare industry and have a financial impact,” he said. “This will be further magnified as Medicare patients are likely to increase as a percentage of hospitals’ payer mix due to the aging population.”

Considering quality measures
Rating agencies will be collecting supplemental information from hospitals for specific data points measuring quality for some time before giving value-based measures explicit weighting in their rating process. For now, they recognize that hospitals providing a high-quality level of care are likely to be more profitable, have stronger balance sheets than their average peers, invest more in technology and take a long-term view for results. 

To get an impression of how CRAs are dealing with the evolving environment of quality metrics, let’s look at two — Moody’s and Fitch:

Moody’s Investors Service — Moody’s introduced six new indicators in a 2013 report to more accurately capture the changing payment and care models. It will use the following to measure demand:

  • Unique patients: the number of people who received care at the hospital in a 12-month period, both inpatient or outpatient.  
  • Covered lives: the number of people within the community for which the hospital is responsible along the continuum of care — either through exclusive contract, the hospital-owned health insurance plan, an ACO contract or through an ACO-like structure provided by Medicare, Medicaid or other commercial payers.  
  • Employed physicians: This figure serves as a predictor of referrals. (Incidentally, hospital doctors better utilize electronic medical records and coordinate care, which the rating agency recognizes as a credit positive.)

For reimbursement risk, Moody’s will initially focus on the following indicators initially:

  • Medicare reimbursement rate: Since Oct. 1, 2012, CMS started penalizing hospitals with high Medicare readmission rates for congestive heart failure, heart attack and pneumonia.
  • “All-payer” readmission rate: This measurement of patients covered by other insurers will include readmissions within 30 days of discharge, no matter the diagnosis, unless it is a part of the plan of care. 
  • Risk-based revenues: Hospitals currently with or in the process of obtaining a Moody’s credit rating will need to annually provide data on the type of reimbursement methodology used in its contracts. Risk-based revenues will include new reimbursement models, such as bundled payment and pay-for-performance. Moody’s will use this metric along with traditional forms of payment, such as DRGs, per diems and capitation in its evaluation.

Fitch Ratings — Although the rating agency already considers quality metrics in its criteria and credit analysis, it’s assessing if hospital boards and senior staff are giving quality sufficient attention in the transition to a fee-for-value model. As part of its credit evaluation, Fitch reviews scores from the Hospital Consumer Assessment of Healthcare Providers and Systems, the first national standardized survey of patients' perspectives of hospital care. The scores, which are posted on the CMS website, are used to determine value-based reimbursement and readmissions bonuses and penalties. Additionally, Fitch asks hospitals to estimate potential future Medicare rate penalties related to HCAHPS or readmissions as well as provide data on the level of patient revenues that are “at risk” for quality performance under their payor contracts.

In evaluating creditworthiness, Fitch recognizes that tracking and reporting quality and safety indicators will impact a provider’s reimbursement and competitive positioning, which are key credit factors. The rating agency will review a hospital’s publicly available quality scores, which may include readmission rates and value-based purchasing metrics, as well as its overall commitment to establishing a culture centered on delivering safe, high-quality care.

According to Fitch, it focuses on IT investments in its assessments and asks hospitals to report on meaningful use, ICD-10 readiness and their Health Information Management Systems Society  level. Overall, the rating agency focuses on consistent improvement across industry standards and results compared with competing hospitals as part of a broader analysis on clinical strategy and competitive positioning.

In assessing quality measures for hospitals, credit rating agencies will be gauging whether a hospital has the clout (scale) to deliver the metrics when needed along with each’s own mix of quantitative and qualitative indicators. Not all hospitals will be at the forefront of innovation and new healthcare strategies because of their size and scope; however, all providers should focus their efforts in developing an informed leadership, expanding access and, especially, improving quality and the patient experience. To remain competitive, hospitals should implement best practices on a large scale and manage costs to keep pace with reimbursement cuts. Finally, when looking to access the capital markets, hospitals need to be familiar with the credit evaluation process, how ratings are evolving in the new normal and be prepared to benchmark themselves to investment-grade medians.

Quintin Harris is a vice president for Lancaster Pollard based out of the firm’s office in Lawrence, Kan., and is the lead healthcare banker for clients in Minnesota, Iowa and Nebraska. In 2011, he underwrote the firm’s healthcare “Deal of the Year.” Prior to joining Lancaster Pollard, Quintin led a distinguished career in international development working in South America and Central Asia. He is a regular speaker on capital funding topics for healthcare providers.

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