Rural hospitals and health-care reform: Standard & Poor's looks at what's ahead.

CHICAGO -- National health-care reforms could give small hospitals more insured patient and better access to advanced-care facilities Standard & Poor's Corp. said in yesterday's edition of Credit Week Municipal

Martin Arrick, an associate director at the rating agency, said that rural hospitals could benefit from the Clinton administration's call for national health insurance. But the gains could be offset by Medicaid and Medicare cutbacks, Arrick warned.

The national press has already reported many details of President Bill Clinton's health-care reform plan. which he is scheduled to unveil tomorrow. Clinton's plan focuses on universal insurance coverage, managed competition, and price controls.

One element of the plan, the formation of relationship with managed-care networks,could give rural hospitals access to large tertiary-care facilities, Arrick said.

Arrick said the plan could also have downside. Price controls pose a risk to all hospitals, rural and urban, he said, and rural hospitals may face increase competition in recruiting primary-care physicians and the possibility that local businesses will burdened by government-mandated employee insurance.

Many rural hospitals, already struggling to attract primary-care physicians, could see their urban counterparts fighting harder to recruit the doctors because of managed care. And with fewer local employers in the vicinity, a rural hospital could be disproportionately burdened by the employee insurance plans the reforms are expected to mandate.

Standard & Poor's currently rates 35 small, mostly rural, hospitals with 100 or fewer beds each. Of the 35 institutions, 28 are investment grade and seven are speculative grade. Seven of the institutions are rated A or A-minus.

In CreditWeek Municipal, the rating agency said that small hospitals have stronger income and balance sheets than larger institutions that are rated similarly. For example, figures on income, debt service coverage, and cash flow are 2% to 5% higher for small hospitals than for larger ones. Small hospitals also generally have larger cash balances.

Standard & Poor's attributed the institutions' strong financial showing partly to effective management and limited competition, given the isolation of the communities they serve.

But Arrick said that small hospitals face financial risks relating to their dependence on the local economy and retention of physicians.

In conjunction with the CreditWeek Municipal article, Standard & Poor's downgraded the bond ratings of three small institutions. The downgrades generally reflected poor financial performance, partly due to admissions or market share declines,, the rating agency said.

About $3.6 million of revenue bonds issued by Amherst Hospital Association in Amherst, Ohio, were downgraded to BB-minus with a negative outlook from BB with a stable outlook.

About $2.5 million of revenue bonds issued by the Michigan State Hospital Finance Authority for Allegan General Hospital in the Grand Rapids-Kalamazoo area were cut to BBB-minus with a negative outlook from BBB with a negative outlook.

About $2.9 million of revenue bonds issued by the Michigan State Hospital Finance Authority for Otsego Memorial Hospital in Gaylord, Mich., were downgraded to BB with a stable outlook from BBB-minus with a stable outlook.

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