Hospitals Facing More Credit Downgrades, Threat Of Closures Looms: Report

Nonprofit hospitals are having a tough time getting the cash they need to stay in business and the situation only looks to get worse, according to a report by the credit-rating organization Moody's Investors Service. Access to medical care, especially for the poor and the uninsured who rely on hospitals, hangs in the balance.

Eleven nonprofit hospitals saw their credit downgraded during the first three months of 2012, which makes it harder for them to obtain financing from lenders, Moody's says. Even though an equal number of hospitals were upgraded during the first quarter, Moody's expects downgrades to outnumber upgrades by the end of 2012.

Closures of vital hospitals can rock communities. Fewer hospitals mean reduced availability of medical care for residents, especially those without health insurance or access to primary care doctors. Moreover, hospitals are often major employers and prominent civic institutions.

Smaller hospitals and those in areas hardest hit by the slow economic recovery are the most likely to see their credit downgraded, according to Moody's. Lower credit ratings make it harder for nonprofit hospitals to access financing they need to keep their doors open. Cash-strapped facilities can be forced to shut down if lenders and bond issuers view them as too risky.

"Smaller providers face multiple negative factors that put them at a disadvantage relative to their larger peers," the Moody's report says. "They generally have limited leverage during negotiations with medical suppliers, pharmaceutical firms, and commercial payers. Lacking economies of scale, they also have operational inefficiencies that make it difficult for them to grow revenue and maintain margins."

Big nonprofit hospital companies are in better shape but, like their smaller counterparts, they face economic headwinds, jobless people postponing treatments they can't afford, more unpaid bills from treating the growing number the uninsured and shrinking payments from private health insurance companies and government programs like Medicaid and Medicare.

Moody's looks favorably on hospitals that acquire or merge with other companies, a maneuver that's harder to make for small cash-strapped facilities. And while these mergers put hospitals on firmer financial footing, they also can lead to higher prices for medical services when one company secures a larger share of a local market and gains negotiating leverage with health insurance companies.

The most hospital mergers in a decade took place last year and the activity has gained the attention of federal antitrust regulators. The Federal Trade Commission is currently seeking to halt several deals between hospitals based on concerns about competition.

The threat of the Supreme Court overturning the health care reform law also looms over the entire hospital industry, including for-profit chains like HCA and Tenet Healthcare. The law includes $155 billion in Medicare payment cuts that hospitals would have to weather if the Court strikes down certain portions of the law. If the Court invalidates the entire law, hospitals could see the Medicare cuts restored or expanded by Congress as part of deficit-reduction legislation. The Supreme Court is expected to issue a decision by the end of June.