Don't let the current stabilization in the U.S. not-for-profit healthcare sector fool you. Looming financial and operational stresses may make this only a temporary rebound, according to Martin Arrick, managing director for Standard & Poor's Ratings Services' not-for-profit healthcare group, in a teleconference on March 2.

"Right now it's an island of calm," Mr. Arrick said, adding that the long-term outlook remains uncertain.

In Standard & Poor's view, the recession, coupled with difficulties in the investment and debt markets, contributed to 70 downgrades in the sector, more than triple the number of upgrades, and weaker median financial ratios in 2009. Credit stabilization began in the fourth quarter of 2009, Mr. Arrick said, and has continued through early 2010 with an increase in upgrades and favorable outlook revisions.

In particular, Mr. Arrick noted a significant rebound in providers' unrestricted cash and investments from the lows of last March; however, they are still below their peaks of the past two years. In addition, debt service coverage, cash flow metrics, and unrestricted liquidity are improving from last year because many providers took very quick steps to control costs and scale back capital projects.

However, Mr. Arrick stated that, in Standard & Poor's view, the weak economy may continue to squeeze the sector's operating margins, even with managers implementing cost-containment programs. "In our opinion, the single biggest issue is payer mix and how it is changing," he said. Factors that Standard & Poor's sees as contributing to the changing mix include the recession, unemployment levels, lack of sustainable job growth, and related insurance coverage. Potential state Medicaid reimbursement cuts are also an issue for the sector.

Other long-term pressures that Standard & Poor's expects to intensify include rising expenses for providers issuing more fixed-rate debt than variable-rate debt, as well as bank liquidity being less available and more expensive. Patient volumes, while more stable recently compared with last year, still aren't growing.

As a result of these difficulties, according to Mr. Arrick, Standard & Poor's expects the credit quality gap to widen between the haves and the have-nots. He also noted the possibility of a refinancing bubble in 2012, when many hospitals that refinanced 2009 will need to do so again. Mr. Arrick noted that Standard & Poor's is seeing many providers get into the market now to avoid the rush.

Related Topics
HFMA 2010 Executive Conference: The Healthcare Imperative: Improving Quality While Driving Down Costs. Featured guests include Maureen Bisognano, David M. Cutler, Ph.D., and Martin Arrick. 

HFMA’s February 2010 Healthcare Financial Pulse research: "Cost Management: Trends, Outlook, and Keys to Success"