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.