wall street comes to washington june 18, 2003 washington, dc bruce gordon senior vice president...
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Wall Street Comes to Washington
June 18, 2003
Washington, DC
Bruce GordonSenior Vice President
Moody’s Investors Service
Center for Studying Health System Center for Studying Health System Change Change
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Aa
a
Aa
1
Aa
2
Aa
3
A1
A2
A3
Ba
a1
Ba
a2
Ba
a3
Ba
1
Ba
2
Ba
3
B1
B2
B3
Ca
a1
Ca
a2
Ca
a3
Ca C
0%2%4%6%8%
10%12%14%16%18%20%
Moody’s Healthcare Rating Distribution Moody’s Healthcare Rating Distribution Is Skewed Toward Lower Ratings Than Is Skewed Toward Lower Ratings Than Public Finance Ratings OverallPublic Finance Ratings Overall
All Public Finance Ratings
Health Care Ratings
•Excludes Credit Enhanced Ratings
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Moody’s Not-For-Profit Moody’s Not-For-Profit Healthcare OutlookHealthcare Outlook
“We believe not-for-profit hospitals will
maintain overall stable credit quality over the course of 2003 . . . However, we also expect the industry to face strong pressure in 2004 and beyond . . .”
January 2003
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• Hospital utilization will continue to grow.
• Commercial rate reimbursement holding firm.
• Medicare reimbursement reasonable by historical standards.
• Hospitals adding new clinical services.
• Decline in M&A activity enhancing ratings.
Factors Supporting Moody’s Stable Outlook
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Industry Developments That Continue to Industry Developments That Continue to Pose Credit RisksPose Credit Risks
• Federal budget deficits could pressure Medicare • State budget deficits already impacting Medicaid • Commercial rate increases probably peaking• Increase in operating expenses• Large capital needs remain• Stock market unpredictable• Future bio-terrorism activity would increase
expenditures• Physicians and niche providers skimming cream
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0
20
40
60
80
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Number of Changes
Upgrades Downgrades
Moody’s NFP Hospital Rating ChangesMoody’s NFP Hospital Rating Changes
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Ratio of Downgrades to Upgrades: Ratio of Downgrades to Upgrades: Six Months 2002 and 2003Six Months 2002 and 2003
1.0
1.5
2.0
2.5
3.0
3.5
4.02002 2003*
Ratio*through 6/10/03
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Reasons for DowngradesReasons for Downgrades
Mergers and acquisitions Non-core operations Construction-related dislocation Capitation Management/physician turnover Merger dissolution
Strategic:
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Reasons for Downgrades Reasons for Downgrades
Large Medicaid and indigent mix Nursing and other staff shortages Unfavorable demographics High governmental payer mix Competition High managed care payer mix Union actions
Local Market:
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Reasons for DowngradesReasons for Downgrades
Malpractice expense Pension expense/funding Stock market losses Incremental debt A/R, contractual, collection problems
Financial:
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Reasons for UpgradesReasons for Upgrades
Improved reimbursement contracting (S) (F)Patient volume increases (S) (L)Increased market share (S) (L)Divestiture of unprofitable ops (S)Digestion of mergers (S)
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Reasons for UpgradesReasons for Upgrades
Good demographics/pop. growth (L)Exclusive services/specialty provider
(S)Sole community provider (L)Cost cutting initiatives (S)Acquisition by higher-rated entity (S)