S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Not-For-Profit Health Careconcerns. For example, a very competitive servicearea, a weak local economy, a weak medical staffprofile or an over reliance on investment incomemight explain why a hospital is rated below whatits financial profile might otherwise indicate.Conversely, the absence of competition and a growingeconomy and population base sometimes cancompensate for lower cash levels or thinner margins.Standard & Poor’s financial analysis highlightsincome statement, balance sheet, cash flow statementtrends and future capital requirements. Onebad year does not necessarily mean an immediaterating downgrade, unless the experience was verysevere or is determined as being the beginning of along-term shift in financial performance. When confrontedby a weak year, Standard & Poor’s carefullyreviews management’s corrective action plan toaccess the likelihood it will return the organizationto financial health. The stronger and more detailedthe correction plan, especially if combined withclear implementation schedules, are generallyviewed more favorably than broad but undefinedcorrection programs. Trend analysis is critical to allrating decisions.Income-statement analysis focuses on revenuegrowth, payor mix and profitability by payor, andoperating and excess margins. Standard & Poor’slooks at local state regulations and funding issues,as well as the level of competition among the insurers.Standard & Poor’s will ask management aboutits managed care contracting strategy, current ratenegotiations and role of pay-for-performance contracts,if any, in the local marketplace. Programs tocontrol costs are also examined in detail, as is overallrevenue cycle performance including managementof bad debt.Standard & Poor’s is interested in measuring aninstitution’s financial flexibility, or its ability tomeet its debt-service requirements even understressful conditions. Also important is an organization’sability to have sufficient cash flow and debtcapacity to meet future capital needs. Low-costproviders with a favorable payor mix and marketdominance will have a clear advantage. Competitivepressures may constrain high-cost providers fromraising prices, although they may be suffering financially.Typically, Standard & Poor’s will ask howthe provider’s costs compare with those of otherproviders, and is interested in any initiatives undertakenor under way to control or reduce costs ofproviding services. Low costs and demonstratedefficiencies are key to strong margins, along withnegotiating clout with managed care payors. Keyincome statement indicators are operating andexcess margins, historical pro forma debt-servicecoverage, and debt burden. Increasingly overall baddebt and charity care levels are impacting marginsnegatively. In some cases community perceptionsthe sufficiency of the charity care that is being providedis an issue that can indirectly impact margins.Standard & Poor’s also uses ratios such as full-timeequivalent employees to adjusted admission, andsalary and benefit expenses to net patient revenueto help analyze trends over time for a single creditand improve comparability between credits in similarmarkets with similar services. Institutions withfavorable ratios have a greater degree of financialflexibility to meet the challenges of today’s environment.Quality metrics are also reviewed in availableand can provide some measure of flexibility iffavorable. Pension funding levels are also reviewed,as they are increasingly an important use of cashthat competes directly with an organization’s abilityto fund capital needs.Although operating and excess margins are bothimportant measures of profitability, Standard &Poor’s believes that operating margin is the bestmeasure of the ongoing ability to generate profitsfrom the business. Excess margins include investmentincome (including realized gains and excludingunrealized gains), as well as unrestricteddonations. However, weak operations combinedwith dependence on non-operating earnings canhighlight underlying weakness in most cases. Somevery well endowed institutions are exceptions tothis especially if their fund raising ability is strong.In addition to focusing on an organization’s abilityto produce profits, Standard & Poor’s examinescash flow statements to measure a credit’s cash-producingability. Our ratios borrow heavily from corporatefinance, and answer the question of whetheran institution is generating sufficient cash flow tofund its strategic objectives while maintaining sufficientcushion consistent with its rating. Key cashflow ratios include cash flow to total liabilities andEBIDA (earnings before interest, depreciation, andamortization expenses). Standard and Poor’s alsoexcludes from excess income unrealized gains orlosses from swap agreements.Standard & Poor’s analysis also focuses on thebalance sheet, particularly leverage and liquidity.Balance-sheet strength is key in today’s volatileoperating environment. An institution with significantliquidity or light leverage can more easily survivethe increasingly common scenarios of reducedreimbursement; poor managed care contracts, orvolatile investment performance. Standard & Poor’suses traditional liquidity ratios such as days’ cashon hand and cash to debt. Standard & Poor’s alsoexamines in detail a provider’s investment allocationand investment policies, especially if nonoperatingrevenue is a significant source of funds fordebt service. In addition, the liquidity of the investmentportfolio is also examined closely especially ifwww.standardandpoors.com155