Hospital Mergers May Enhance Debt Ratings by Reducing Risk, Moody’s Says

A wave of hospital mergers, driven partly by the slow economic recovery, reduces financial risks for many institutions and may boost credit ratings in the $3.7 trillion municipal bond market, Moody’s Investors Service said.

Reimbursement pressures and rising costs coupled with the prospect of “healthcare reform and an unsustainable payment system” have driven not-for-profit hospitals to look for partnerships, Moody’s said in a report released today. They are choosing to consolidate with other health-care systems to boost their market presence and strengthen balance sheets, analysts led by Lisa Goldstein said in the report.

“Consolidation offers the promise of greater operating efficiency and risk diversification across larger organizations, likely leading to stronger and more stable bond ratings for affected hospitals,” Goldstein said in the report.

Smaller stand-alone hospitals that don’t merge with other institutions may have difficulty matching the operating performance and market access of larger multi-hospital systems and ”will face greater negative rating pressure going forward,” according to the report.

Medicare reductions included in the Balanced Budget Act of 1997 drove hospital consolidations in the 1990s, the analysts said in the report. This year, continuing Medicare spending cuts along with changes in reimbursement formulas by insurers are putting pressure on providers, spurring a new round of mergers.

At the same time, the recovery from the longest recession since the 1930s, “spiraling” health-care costs and riskier debt structures have fueled moves toward consolidation, according to the report. It listed other drivers including increased regulatory expenses and underfunded pension plans.

“Largely absent in the last consolidation wave, significant pension liabilities for hospitals with defined benefit plans is a new issue in consolidation discussions,” the analysts said in the report.

To contact the reporters on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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