The approach taken by organizational leadership teams to their rating agency review is vitally important in today’s rapidly evolving environment. An organization’s long-term competitive position is substantially dependent on its ability to raise affordable capital in the debt markets. This, in turn, is highly dependent on the organization’s credit rating and overall creditworthiness, so credit ratings matter.


Numerous expense and reimbursement pressures are affecting or could affect the credit ratings of healthcare borrowers and their access to capital. Additionally, Federal tax reform, direct competitive pressures between the corporate and nonprofit healthcare sectors, and other factors are fostering a greater degree of uncertainty and risk in the capital markets themselves.

For all of these reasons, preparation for a rating review is really important. In-person rating agency meetings and subsequent communications are intended to enable rating agency analysts to assess the management team and an organization’s ability to repay debt—i.e., its risk of default. The end product from the rating agency is a specific rating and Outlook, which is reviewed regularly for the life of bonds or other instruments outstanding.

At the recent Kaufman Hall Healthcare Leadership Conference in Chicago, senior rating agency representatives offered insights about what they look for from management teams during in-person reviews. Selected comments on key aspects of rating agency reviews appear here from Martin Arrick, Managing Director of U.S. Public Finance Ratings Group at S&P Global; Lisa Goldstein, Associate Managing Director of Not-for-Profit Healthcare Ratings at Moody’s Investors Service; and Kevin Holloran, Senior Director and Sector Leader of the Public Finance Department at Fitch Ratings.

Time Horizon

Martin Arrick
Although an organization’s desired debt issuance may involve payments over a 30-year period, a credit rating is our current view of organizational ability to repay that debt. Our outlook generally covers a two-years-forward view for organizations with investment-grade ratings, and one-year forward for those with speculative-grade ratings.

Disruptive elements facing the sector or specific organizations may not have an immediate or near-term impact on their credit quality. For other organizations, major market disruptions may already be occurring and will need to be factored into the current rating and/or outlook.

We like to hear about what organizations are doing to address both current and potential issues. For example, a health system identified a royalty revenue stream that would be going away, so we factored that into our credit thinking because it was a definite outcome, albeit five years away. Or, as another example, the management team of a health system described its efforts to create a continuum of outpatient service offerings in an area where nontraditional competitors were starting to offer ultra-competitive low-intensity services. This discussion informed our thinking as well.

Rating Criteria and “The Story”

Kevin Holloran
In September 2017, Fitch Ratings released proposed revised criteria, centering on key rating drivers—revenue defensibility, operating risk, financial profile, and asymmetric additive risk factors (e.g., debt structure, management and governance). After considerable market input, the criteria are now final, and were officially released Jan. 9, 2018.

Because the country’s healthcare system remains largely fee-for-service, rating criteria are still inpatient-focused. But we will adapt the criteria as the pendulum swings toward value. Metrics that potentially would penalize organizations that are doing the right things—i.e., keeping people out of the hospital by moving to a population health approach—will be de-emphasized.

Days cash on hand (DCOH) is one such metric. Organizations that are starting a health plan or a research program that might be monetized, employing physicians, or even functioning as a pharmacy benefits manager, have a growing expense base that squeezes DCOH. So emphasis on this metric penalizes such organizations for pursuing approaches that are promising to population health management.

“There are no heavy, hard weights with our criteria. Rather, plenty of leeway and flexibility exist during rating reviews for leadership to tell the organization’s ‘story.’ We want to hear this story.” –Kevin Holloran, Fitch Ratings

Nontraditional Metrics and Organizational Direction

Lisa Goldstein
In 2013, Moody’s introduced 21 new indicators with some important nontraditional elements. These included new demand measures such as unique patients and new risk indicators such as risk-based revenues, employed physicians, and Medicare readmission rates. While inpatient admissions will continue to be important, unique patients will be a way to measure market share under population health strategies. This indicator is the number of individuals who receive care at the organization, whether inpatient or outpatient and irrespective of the number of visits, within a 12-month period.

Our conversation with a management team might include their efforts to improve health outcomes in their community (for example, by setting up mental health centers for the opioid crisis), new care coordination and consumer-centric approaches, and how much these initiatives will cost.

“Rating reviews will continue to be financially oriented, but during the meeting with us, management teams should not be surprised if we don’t discuss the numbers at all. We want to use the face-to-face time to talk about strategy, governance, future direction, and levers the organization can pull if financial performance starts to decline. Getting into the nitty gritty of specific numbers, ratios, and computations can be accomplished via follow-up phone calls.”

Consumerism, Payers, and Plan B

Kevin Holloran and Lisa Goldstein
Mr. Holloran: Consumerism is an issue that arises frequently during our rating review meetings. Like population health, it gets a disproportionate amount of discussion, although not quite as much action is taking place nationwide. But it’s the way healthcare is going. We want to know specifically how the organization is improving consumer access and approaches. One organization whose debt we rate is trying to completely reimagine the patient experience from the consumer perspective. They’re “living” consumerism, while others are just talking about it. Organizations that are not considering consumerism, whether through retail clinics, minute clinics, investments in technology-based delivery gadgets, or other approaches, are going to quickly fall behind the curve.

Ms. Goldstein: The biggest current environmental issue we see right now involves payers and the pressure payers are putting on a provider’s top-line revenue. Many negotiations between payers and providers seem to be acrimonious, with many payers concluding “we’re done” with a specific provider. The challenge is that payers may have as much—if not more—brand equity in local markets, or regionally and nationally, as the healthcare organizations whose debt we’re rating. Payers also are steering patients to non-hospital based facilities for imaging and other outpatient services, raising the competitive landscape. Hospitals and health systems should have a Plan B for a scenario when they don’t get the rates and terms they are seeking in payer negotiations; and inform us if the contract vaporizes. Informing us early on about the substitute revenue strategy or a corresponding expense reduction strategy is recommended.

Forecasts and Assumptions

Martin Arrick
We definitely want to see organizational forecasts (which some organizations don’t share at this point in time). Forecasts should provide adequate level of detail, including assumptions, and extend three to five years, as appropriate.

For example, when we asked one management team about the possible impact of developments from Washington, an executive replied, “Let’s assume that with state Medicaid cuts to FMAP (Federal Medical Assistance Percentage), our percentage goes back to 55 percent; here’s the impact to our Medicaid book.” And the executive showed us specific forecasts for how the reduction would roll out and its impact on the organization’s revenue during the next years.

We want to understand the assumptions underlying the forecasts and learn what the organization sees as the risks. Conservative forecasts that management knows the organization can beat are less helpful; rather, we want to review a forecast that the management team believes they have a 50/50 chance of achieving or not.

“An organization’s credit rating is an asset to be managed as other assets. Protection and improvement of a credit rating requires careful attention and a high-quality financing plan.” –Terri Wareham, Kaufman Hall

Common Mistakes

Lisa Goldstein, Martin Arrick, and Kevin Holloran
A fair number of management teams come to the meeting ready to describe everything only as “going great.” The reality is this: Every organization in U.S. healthcare has a story to tell, and that story likely includes some degree of risk. So we want an open, honest, and brass-tacks dialogue, not a canned or rehearsed presentation.

When organizations are merging, and using the co-CEO and co-CFO model, we want to see one solid game plan, understand the interplay of the co-leaders, and why the combined organization has chosen the 2X2 model.

The more intimate the discussion via fewer people present, the better. It’s very valuable for us to see the depth of the next generation of leaders, and for organizations to give all meeting attendees a chance to speak—if they add value.

Concluding Comments

Terri Wareham
By requesting a public rating, a healthcare organization is inherently committed to interacting with and providing ongoing information to the rating agency for the term of the issued debt that carries its rating. An organization’s credit rating is an asset to be managed as other assets. Protection and improvement of a credit rating requires careful attention and a high-quality financing plan. This plan reduces the average cost of debt and ensures access to debt to meet capital requirements.

To protect their credit ratings, the management teams of organizations with solid credit ratings bring to their rating reviews appropriately detailed information and highly engaged and informed c-suite leaders, who speak succinctly about the organization’s strategy, financial plan, and demonstrated track record in achieving strategic and financial targets. The anatomy of a rating agency review is as fluid as the rapidly evolving healthcare environment. Readiness is imperative.

Kaufman Hall sincerely thanks the rating agency analysts for their participation in the conference session and this follow-up article.

Anatomy of a Rating Agency Review