Sunday, February 03, 2008

Quality and bond ratings

As non-profit corporations enter the tax-exempt bond market to sell debt (i.e., borrow money) in support of their clinical, research, and teaching missions, they receive credit ratings from Moody's, Standard and Poor's, and Fitch. The people at these rating agencies conduct a thorough review of the many business aspects of each hospital or hospital system that is issuing debt and give a grade as to its credit-worthiness. This grade has a direct and real impact on your cost of borrowing and thereby on your ultimate cost of providing service to the public.

Recently, Moody's issued a report entitled "Clinical Quality Initiatives Have Positive Long-Term Impact on Not-for-Profit Hospital Bond Ratings". Here is a publicly available excerpt:

From a credit perspective, a not-for-profit hospital's focus on a quality agenda can translate into improved ratings through increased volume and market share, operational efficiencies, better rates from commercial payers, and improved financial performance. Like many strategies, we recognize that realizing financial returns from a quality strategy may require large capital costs and incurred operating losses in the short term. However, over the long-term, a hospital's focus on quality will be viewed as a credit positive if greater patient demand and financial improvements materialize. Many not-for-profit hospitals are launching strategies to improve evidence-based clinical outcomes and patient safety, which we view as the two key facets of a strategy aimed at improving quality. The effort to improve quality is a major component of most hospitals mission to provide the best patient care possible.

And another:

Moody’s anticipates that in the short-term, strategies to improve quality and patient safety will likely reduce operating results for many hospitals as the tools and steps to implement the strategy may require adding costs faster than benefits are realized. However, hospitals that eventually demonstrate a sustainable link between quality investments and better clinical outcomes will likely gain competitive advantage, thereby improving financial performance and possibly their bond ratings.

This is an interesting point of view and one worth watching over time, to see if these financial results materialize. I have to admit that our decisions to adopt audacious quality improvement targets actually were not driven by this kind of business strategy. They were driven, plain and simple, by a desire to do a better job taking care of patients, a fundamental goal of the organization. Further, as I have noted:

The main value of transparency is not necessarily to enable easier consumer choice or to give a hospital a competitive edge. It is to provide creative tension within hospitals so that they hold themselves accountable. This accountability is what will drive doctors, nurses, and administrators to seek constant improvements in the quality and safety of patient care.

That being said, I certainly would not mind if the trends projected by Moody's turn out to be true -- and their analysts surely are more knowledgeable than I because of their broad industry experience. In the meantime, over the next few months, CareGroup -- the holding company that owns BIDMC, New England Baptist Hospital, and Mount Auburn Hospital -- plans to issue bonds to finance important patient improvements at the hospitals (like a new Emergency Department at BID~Needham) and to take advantage of low interest rates to refund older outstanding debt. We were pleased to note that a January 30, 2008, bond rating by Moody's for the forthcoming bond issue had the following paragraph:

CareGroup's hospitals have set high standards to meet quality initiatives in their pursuit of transformational change. CareGroup's three major hospitals have been included in a pilot program established by Blue Cross and Blue Shield of Massachusetts to reduce unnecessary procedures and transform the delivery and quality of care provided. To that end for example, BIDMC is holding itself publicly accountable to certain standards and scorecard measures that providers nationwide have historically never before publicly disseminated. We applaud all these efforts and believe it could be a differentiating factor for CareGroup in its market.


Mike said...

Paul, would you say that Moody's is forewarning healthcare organizations to develop quality and patient initiatives now, even though (as Moody's mentions) costs may grow faster than earnings) short term, otherwise realize that an organization's credit rating and ability to purchase debt in the future may be quite difficult?

Paul Levy said...

It is a little awkward to speculate, but I am guessing they are watching two growing public demands for the healthcare system -- (1) towards quality and safety improvement and transparency and (2) improving cost efficiency -- and suggesting that those hospitals that get ahead of the curve will be better credits.

David Harlow said...

Moody's releases these reports periodically, noting the kinds of things they think can lead to better bottom lines. As Paul notes, the reports don't say invest in IT despite the short-term dip in net revenue because you'll make it up later -- they say you *might* make it up later, if you manage your business appropriately. To cite another example, a couple of years ago Moody's identified physician-hospital integration, or systemness, as a worthy goal . . . and not just because evidence-based medicine may show that systemness improves coordination of care, just as the current pronouncements on investments in quality are not all about the new IT systems that enable their development. In both cases, Moody's is interested in the mechanics of health care only as a means to an end: wise investments yield better care, which yield improved market share, better contracts, etc., which yield more green to pay off bond debt.

Barry Carol said...

The current business model rewards hospitals for volume. Yet, I've heard experts suggest that there is significant excess hospital capacity from Boston down through the Washington D.C. corridor. Medicare spends considerably more per beneficiary in these markets (as well as in South Florida, Southern CA, and elsewhere) than it does in MN or UT with no difference in outcomes. Improved quality includes providing patients with the right care, not just more care, and it means reducing infection rates and complication rates, avoiding serious errors (never events), duplicate testing and adverse drug interactions.

To the extent that BIDMC and other hospitals are successful in driving this waste out of the system, their revenues will decline and the surplus of beds will increase. That is a formula for lower profits, lower bond ratings and higher interest rates when you sell debt. I believe hospitals really need a different payment model that rewards lower utilization and removing excess beds from the system, similar to paying farmers NOT to plant when there is a significant crop surplus. Or, at the very least, payers need to look more seriously at gain sharing.

Michael LaPia said...


How much faith do you have in the bond rating company's in this environment?