SAN FRANCISCO -- Hospital ratings will continue their 10-year-long migration away from the A category for several more years, increasing the number of both speculative-grade and double-A facilities, health-care analysts predicted this week.
"This is survival of the fittest, health-care style," said Joan Pickett, a senior vice president at Standard & Poor's Corp. "The stronger hospitals have been able to build on their strengths, usually at the expense of weaker ones."
Ms. Pickett, speaking in San Francisco at the rating agency's annual health-care seminar yesterday, noted that in 1991 the percentage of hospitals rated A by Standard & Poor's fell to 42% from 73% in 1983.
Junk ratings ballooned to 9% of the agency's total debt rated in 1991, from just 1% in 1983. The percentage of hospitals rated AA doubled, to 8% from 4%.
Ms. Pickett said that while the increase in noninvestment-grade and BBB-rated bonds is an "alarming trend," she remarked that over all, the rating agency still has more than half of its outstanding hospital ratings in the A range.
Robert A. Fuller, manager of Standard & Poor's health-care group, said the shift away from "artificially strong" hospital credit ratings is the result of changes in governmental and commercial payment policies.
The shift was from a retrospective reimbursement system based on the number of days a patient spends in the hospital to a prospective pricing system based on admissions and treatment.
Mr. Fuller said those kinds of reforms have removed the "tacit financial safety net" for weaker facilities.
The increase in AA facilities was the result of new, unrated hospitals seeking ratings, rather than existing ones being upgraded, according to Standard & Poor's.
But the jump in speculative-grade ratings reflects real credit deterioration, said Cynthia Keller, a health-care analyst at Standard & Poor's.
The most typical noninvestment-grade facility is a single hospital that lacks the support of a multihospital system and suffers from high management turnover, she added.
Ms. Keller further noted that these financial characteristics typify speculative-grade hospitals:
* A low or declining revenue base.
* Operating losses.
* Slim liquidity.
* Low fund balances.
* A heavy concentration in urban centers, where competition is weeding out the weak, and in rural areas, where access is a problem.
Because of the Midwest's severe economic downturn during the 1980s, a larger proportion of noninvestment-grade and defaulted hospital bonds come from that region, according to Standard & Poor's.
Michigan accounts for six of the agency's 51 junk ratings, more than any other state. Five are in Illinois.
Ms. Keller said she believes more defaults are likely over the next several years, as continued competition and uncertainty over national reform of health-care finances take their toll.
After a 10-year span during which there was not a single default among hospitals, three facilities defaulted in 1989. Another seven have defaulted since then, including four in the first quarter of] 1992 alone.
"We expect further defaults, and we expect to see further shifts in ratings toward a more even distribution among rating categories," Ms. Keller said.
On average, a hospital headed for default spends about six or seven years moving down the rating ladder, from investment-grade. After that, it usually takes about three more years before default, according to Standard & Poor's.
One credit burden for hospitals, agency officials acknowledged, is that Standart & Poor's has stiffened the criteria for its top tier.
"It's definitely harder to get an A rating now," Ms. Keller said. "You need stronger numbers now."
But there is some good news. Two of the facilities that defaulted in the 1970s -- Hilton Head Hospital in South Carolina and Midlands County Hospital in Nebraska -- are now rated BB-plus.