Moody's: Risk management now a crucial variable in determining hospital credit strength

Effective risk management is becoming an increasingly important factor in determining the credit strength of nonprofit hospitals, according to a Moody's Investors Service report.

Nonprofit hospitals should focus on risk management across the following four key areas, according to Moody's.

1. Information technology and cybersecurity. Moody's said IT systems, which make up roughly 25 to 35 percent of a hospital's capital budget, present a risk of cost overruns during installation and maintenance. Risk management associated with IT also includes guarding against cyberattacks.

2. Clinical quality and brand protection. "Maintaining high clinical quality will increasingly impact financial performance and reduce the risk of brand impairment," said Moody's. On the other hand, the perception of poor quality of care can have a negative effect on a hospital's brand, patient demand and profitability.

3. Balance sheet health. Hospitals with higher cash reserves are able to protect against riskier debt structures, invest in capital projects, undertake more aggressive investment allocation and better withstand financial downturns. "A healthy balance sheet provides a hospital with a buffer against unexpected liquidity demands and is a strong measure to credit quality," said Moody's.

4. Reimbursement. It is vital for hospitals to strengthen their ability to manage risk as reimbursement becomes more directly linked to patient outcomes, according to Moody's. "The risks lie with changing reimbursement models involving both traditional insurers and the growing number of hospital-owned plans," said Moody's.

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