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Leaders of Stanford Hospital and Clinics and Lucile Packard Children's Hospital expressed disappointment after a credit-rating firm downgraded the hospitals' bond rating, but said they are engaged in efforts to reduce costs while also capitalizing on the solid market position of both hospitals to improve their financial forecast.
Moody's Investors Service, a global credit-rating, research and risk-analysis firm, announced Aug. 16 that it was downgrading the hospitals' bond rating from A-2 to A-3 (Aaa is the highest rating the service awards). These types of ratings are used to gauge a corporation's creditworthiness and ability to repay long-term debt, and are re-evaluated periodically. The two hospitals form a single group that is obligated for the aggregated long-term debt of both hospitals.
The reduction in the bond rating does not affect current operations and has no direct impact on the financial condition of either hospital, said Michael Peterson, interim CEO for Stanford Hospital and Clinics. He said there are no plans to acquire additional debt and the existing long-term debt of $230 million is insured, meaning there is no change in the interest payments made by the hospitals.
"The decision by Moody's is disappointing but not surprising," Peterson said. "It reflects the complex, dynamic health care market in which we compete and the fact that our health care reimbursement system is broken."
For instance, Peterson noted that under capitated HMO contracts, which pay flat monthly fees regardless of the cost of the patient care provided, hospitals and physicians are not adequately compensated for their services. He said the problem is particularly acute at Stanford and in the Bay Area - one of the most underfunded health care markets in the country.
Officials announced in April that the hospitals would exit capitated HMO contracts at the end of the current calendar year. They are now negotiating with health insurance companies on plans that will adequately reimburse the hospitals and physicians for their costs.
The move out of capitated HMO contracts is part of a larger effort to address potential shortfalls this fiscal year and next. Earlier this year, officials announced that Stanford Hospital and Clinics was poised to lose $40 million in the current fiscal year if no actions were taken, and up to $85 million in fiscal year 2002.
"In the face of increasing financial uncertainty last spring, we developed a series of programmatic changes to aggressively control costs," Peterson said. "When we realized earlier this year that our budgeted targets were not being met, we initiated additional changes, such as operational expense reductions and program closures. Although we have made great strides in these efforts, there is still much work to be done."
Packard Children's Hospital is targeting a $2 million operating gain in fiscal 2002. "Achieving this level of financial performance is a challenge," said Christopher Dawes, CEO of Packard Hospital. "It will require the continuous focus of our physician, staff and managers."
A leadership committee has been meeting regularly to consider the options and has initiated a number of cost-saving measures for the current fiscal year as well as the 2002 fiscal year. Stanford Hospital officials have already identified more than $84 million in cost reductions in fiscal 2002 and are working to identify an additional $13 million in reductions to move the budget close to a break-even point.
Peterson said Moody's indicated in its rating review that Stanford's strength as a unique academic medical center is its prominent, solid position in the market. "Our leadership role will serve us well as we continue to reduce costs and take positive steps to brighten our financial forecast," he said.
