The effect of health care quality on hospital credit ratings

Many hospitals rely on bond funding for their expansion and the purchase of new equipment.  Revenue that is created by the hospital is then used to pay back the bondholders.  The risk to bondholders is that they are generally paid after the hospital pays its operational expenses.  Therefore, if the hospital is less profitable than expected (or not profitable at all), bondholders assume the financial risk.

Hospitals have historically been rated by credit rating agencies (CRAs) based on their financial profile, which is largely determined by their balance sheet and market share.  Other factors like a stable, strong hospital management team, a robust payer mix, and providing unique health care services that competitors lack, also play into the formula.  Things like debt, a large percentage of Medicare and Medicaid patients, and volume loss can contribute to a low credit rating.  Factors that disrupt hospital revenue streams such as EHR implementation and ICD conversions can also have an impact on credit ratings.

In the past, low-rated hospitals have used tactics such as merging with higher-rated hospitals, diversifying payer mix, recruiting doctors, and opening new service lines in order to boost their credit ratings.  But will these tactics work in a system that rewards value rather than volume?

With CMS quality measures being tied more and more to hospital reimbursement (and therefore profitability), CRAs are looking at ways to apply quality metrics to their hospital investment grade ratings.  These savvy agencies understand the basic tenet that hospitals which provide a higher level of quality care tend to be more profitable.  In the move from fee-for-service to value-based payment models in health care, it’s not surprising that CRAs are looking at various quality metrics when assessing investment risk.

Some factors they are looking into include Medicare reimbursement rates (which are of course closely tied to quality metrics like readmission rates), publicly available quality scores, HCAPS scores, and commitment to establishing a culture of safety.  Some CRAs are also planning to emphasize IT investments such as EHRs and data analytics platforms, while also looking at meaningful use and ICD-10 readiness.

Tying these quality factors to hospital credit ratings and subsequent bond funding available should help to bring quality even more front and center in c-suite and hospital board meetings.  Of course, the ultimate ability to transform quality of care lies in the hands of the front-line health care providers.  With the bottom-line becoming increasingly tied to quality and patient safety, hospital administrators need to work closer than ever with physicians and other members of the health care team to help them with the resources they need for institutional transformation.

Hospitals should be focusing on improving their quality of care in advance of these changes. Those institutions that wait for the CRAs to act first may find themselves in an increasingly difficulty position to receive bond funding.  With the known inverse relationship between health care quality and cost, it would make sense to assume that those hospitals who might need bond funding the most may be the ones in worse shape to begin with.

Alexandra S. Brown is associate director, Healthcare Delivery Institute, HORNE LLP.

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