CHICAGO -- AA-rated hospitals and health care providers are least likely to be hurt by anticipated national and state health care reforms due to their market preeminence, quality of care, and comprehensive services, according to Standard & Poor's Corp.
"In the era of expected health care reform, these AA credits are better positioned to withstand the challenges posed by national or state reform, and conceivably, could benefit from it," the rating agency said in today's edition of CreditWeek Municipal.
Standard and Poor's said that in a reform setting AA-rated institutions are likely to form the base of a health care network system as they receive referrals from primary care facilities.
President Bill Clinton reportedly will unveil his long-awaited national health care reform plan on Sept. 22. Many states have already implemented or are considering implementing their own reform plans before Clinton presents his own.
Hospitals on the AA list have a competitive advantage over other hospitals because they have strong ties to their medical staff and easier access to capital markets, Standard & Poor's said.
In addition, the financial flexibility of AA-rated health care providers, which stems from their liquidity and fund-raising capabilities, will enable most of the institutions to withstand potential declines in profitability associated with health care reforms.
Despite a tougher operating environment and uncertainties associated with health care reform, the number of not-for-profit health care providers in the AA-category has increased to 62 from 25 since 1984, Standard & Poor's said. The category accounts for $1 0 billion of debt, or 7% of the rating agency's total not-for-profit health care ratings.
Standard & Poor's said that the strength of institutions in this category stems primarily from their strong market position, consistently stable financial performance, and superior liquidity. "
Overall, AA-rated health care providers exhibit more financial flexibility than lower rated credits, partly due to the control of operating expenses and healthy revenue growth, Standard & Poor's said.
The institutions have also garnered consistently stronger net income over the last five years, resulting in revenues that are 4.4 times the amount of debt service required. Median debt service coverage for investment grade credits is 2.75 times.
Though AA-rated institutions assumed 87% more debt in the last five years, their financial ratios have not been adversely affected, Standard & Poor's said. Debt-to-capitalization levels remained in the mid-to-low 30% range.
"Much of the increased debt helped these institutions remain ahead of their competitors, as the funds were used to help finance capital additions, including new outpatient surgery centers and the most technologically-advanced equipment," Standard & Poor's said.