Many healthcare institutions are at risk of credit downgrades and defaults as they continue to grapple with high costs in an inflationary economic environment.
25 North American institutions in the hospital, pharmaceutical, medical device and healthcare services sectors were downgraded this year to B3- or below, according to Moody’s Investor Services. A report from Moody’s called it “a severe deterioration in the credit quality of the industry.” Besides economic factors, laws like the No Surprise Act and opioid-related lawsuits also pose more of a risk.
A rating of B3- or below is given to companies with precarious financial situations, but it does not necessarily signal an impending default. Jean-Yves Coupin, senior analyst at Moody’s, said most of the downgrades this year took place in the second half of the year.
According to the rating agency, there are a total of 34 healthcare institutions rated B3- or lower by Moody’s and they have outstanding debt of nearly $65 billion. Twelve out of 34 were classified as hospital or other based providers.
Institutions setting up debt arrangements in a stronger economy are currently experiencing reduced cash flow while interest costs rise.
“Your leverage is reaching a much higher level than anyone ever planned because you’re not generating enough income and cash flow the way you think you should,” said Peter Abdill, managing director of Moody’s. “You’re spending all your cash just to cover interest expenses. Sometimes you just don’t have enough money to get back into business and you don’t have the buffer to take in any more bad news.”
Most healthcare institutions rated B3- or below by Moody’s are owned by private equity – the result of investors consolidating services that are fragmented in the industry and burdensome. giving them higher debt levels, putting pressure on cash flow at a time when operational performance is already strained.
Private equity investors have shown a increasingly interested in the healthcare industryespecially in specialized services. Healthcare is seen as a more stable investment, as investors don’t expect factors, such as the COVID-19 pandemic, rapidly rising interest rates, and government-directed changes to the economy. with reimbursement plans.
“Nobody believes this,” said Abdill. “They really didn’t think this was going to happen — by the way, neither did we.”
The report shows that as of January 2020, 13 healthcare companies have defaulted, 10 of which are due to troubled exchanges, an option for struggling institutions to avoid bankruptcy. and three companies due to bankruptcy. Moody’s considers troubled exchanges to be insolvent.
Envision Healthcare is headquartered in Nashville, Tennessee Moody’s downgraded in September has defaulted twice since January 2020 and is at high risk of bankruptcy, challenged by pandemic-related labor and labor costs, weak liquidity and poor performance.
The Franklin, Tennessee-based for-profit Community Health System defaulted on its debt in December 2020, in part due to high debt leverage, cumbersome cost structures, and weak liquidity.