How the COVID-19 pandemic and other factors are affecting credit ratings in the not-for-profit healthcare sector

• Moody’s Investors Service downgraded the not-for-profit healthcare sector’s outlook from stable to negative amid the COVID-19 pandemic.
• Downgrades of individual organizations are rising this year, but much of the increase thus far is attributable to factors other than COVID-19, a Moody’s analyst explained during HFMA’s Digital Annual Conference.
• Access to liquidity is vital to a hospital’s ability to weather the storm, and thus to its credit rating.

As hospitals grapple with the fallout from the COVID-19 pandemic among other issues, the industry’s collective finances predictably are taking a hit.

That drove the decision by Moody’s Investors Service to change its outlook for the not-for-profit (NFP) healthcare sector from stable to negative in March, Lisa Goldstein, associate managing director with Moody’s, explained during a presentation Wednesday as part of HFMA’s Digital Annual Conference. The session was sponsored by CareCredit.

“We haven’t seen anything like this,” Goldstein said, referring to the pandemic. “The industry has been through shocks, but [not] something that has been so long-lasting in its duration.”

Lisa Goldstein

Moody’s projects hospitals’ cash flow to decrease through early 2021, in large part due to a reduction in elective procedures. Meanwhile, expenses are rising for staffing, personal protective equipment and other resources.

CARES Act funding and Medicare advance payments can ease some the liquidity strain but are unlikely to fill the gap entirely.

“Until you hear otherwise, the sector outlook is negative,” Goldstein said. “It doesn’t mean we’re putting negative outlooks on everybody, let me assure you.”

Downgrades are on pace to top recent years

Moody’s rates about 360 NFP hospitals and health systems, covering 1,300 to 1,400 hospitals in all. As of mid-June, the agency had downgraded the credit ratings of 24 organizations in 2020, Goldstein said, compared with 34 in all of 2019.

“There will be more downgrades as we see how folks land after the containment period,” Goldstein said.

However, she added, most current ratings are likely to be affirmed.

Most downgrades so far in 2020 happened during the first quarter of the year and thus were not attributable to the pandemic, Goldstein said.

“We were seeing basic, fundamental operating challenges that were becoming more and more pronounced,” Goldstein said. Those included:

• Site-of-care issues (e.g., decline in inpatient cases, rise in observation stays, loss of outpatient cases to nontraditional competitors)
• Difficult IT installations and conversions to bigger, more sophisticated systems
• Staffing shortages and productivity challenges
• Material increases in debt

Liquidity is paramount

Liquidity is vital to hospitals’ ability to weather the ongoing financial crunch — and thus to Moody’s credit ratings.

Liquidity for NFP hospitals will be a challenge this year, but perhaps not a dire one. Moody’s estimates the average days of cash on hand will be close to 200, which would be a negligible drop-off from the end of 2019.

Payments from the CARES Act Provider Relief Fund (PRF) will provide some mitigation. PRF payments total $175 billion as allocated by the CARES Act and the Paycheck Protection Program and Health Care Enhancement Act.

Moody’s views the PRF disbursements as only moderately favorable for the industry, Goldstein said, because they basically amount to two months of government spending on healthcare. Other cash-flow boosts include:

• Medicare advance payments, although those will need to be repaid starting later this year
• A CARES Act provision that allows employers to defer payments on remaining 2020 payroll tax liabilities

Over the next six to 12 months, Moody’s anticipates a potential decline in liquidity as Medicare recoups advance payments. That could be offset by reductions in capital spending, payroll-tax deferments and negotiations with lenders to avoid covenant breaches. There also should be additional infusions from the PRF over the next few months, and providers can apply for FEMA funding and perhaps business-interruption insurance payouts.

“Liquidity is still a concern, but we’ve moved it over from being a front-burner [issue] to be on the side burner, because of some of the funding coming from Medicare at least temporarily providing a liquidity Band-Aid,” Goldstein said.

Looking to an uncertain future

The pace of return to something approaching business as usual likely will vary by market and will hinge in part on a factor largely outside the control of hospitals: Whether patients are comfortable coming back for care.

“That’s the big unknown,” Goldstein said.

Even if the coronavirus is contained in 2020, Goldstein expects the pandemic to continue affecting credit ratings in 2021. “The other shoe to drop will likely be the economy and the impact on unemployment, joblessness rates and healthcare coverage,” she said.

Even as the sector experiences volatility, however, credit ratings may remain steady.

“Your bondholders have told us over the years, ‘We don’t want ratings moving all over the place. We want you as surveyors of risk to do your best to rate through the cycle.’ So the message to you here is:  We are trying to take a very measured approach,” Goldstein said.