The not-for-profit healthcare sector has begun to stabilize, but many questions remain about its health in the longer term and Medicaid funding one of the most troubling problems, according to a report from Standard & Poor's.
The report makes the following points.
1. Credit stabilization began in late 2009. While downgrades exceeded upgrades by a ratio of 3.2:1 in all of 2009, upgrades rebounded in the fourth quarter to a ratio of 1:1. The ratio of positive outlook changes to negative changes was 2:1 for bonds of acute-care providers in 2009 but improved to a ratio of 1:1 in the third quarter.
2. Providers shifted toward fixed-rate debt. Many providers have had difficulties accessing credit markets since late 2007, when a decline of the auction-rate market began and accelerated into early 2008. Many providers refinanced or converted auction-rate bonds to other short-term instruments. But this created a new set of problems, including increased bank renewal risk and lack of permanent capital. This development coincided with a sharp decline in unrestricted cash and investments at many providers.
3. Improved operations are bolstering results. Providers reduced expenditures, curtailed capital spending and made conservative adjustments in debt and investment portfolios. These steps will likely reduce volatility and enhance long-term financial stability. "For many, we believe the cost-cutting initiatives were stronger than the underlying weakness in revenues," the report stated.
4. Problems could return at any time. Despite the company's favorable near-term forecast, "we also think that the many challenges in this environment could intensify at any time and tilt what we see as the sector's emerging but fragile stability back toward last year's negative outlook," the report said.
5. States struggle to fund Medicaid. With extra federal stimulus funding for state Medicaid programs scheduled to run out in Dec. 2010, "one of the most serious issues is the financial health of states and their ability to fund Medicaid," the report said. As states consider budgets for fiscal year 2011, which begins on July 1, 2010, many of them will trouble funding a rising demand for Medicaid services. "Providers are likely to be squeezed financially," the report said.
6. Other negative trends won't go away. Softer operating results, weaker revenues, slower growth in inpatient volumes, rising costs of capital, higher bad debt and charity care costs, and rising physician subsidies are likely to continue. "However, we view these factors as generally incremental in nature and affecting overall credit quality over longer periods of time," the report said.
7. Likely impetus for cost controls moves from Congress to CMS. While health reform legislation founders, CMS "may act more unilaterally to control costs and implement pilot programs aimed at reforming payment incentives," but they are not likely to have impact on credit this year.
Read Standard & Poor's report on healthcare finances (pdf).