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JANUARY 25, 2012

U.S. PUBLIC FINANCE

OUTLOOK

U.S. Not-For-Profit Healthcare Outlook Remains Negative for 2012

Continuation of Negative Outlook Driven by Increased Revenue Pressures From All Payers and Challenges Resulting from the Transition to a New Healthcare Delivery Model

Table of Contents: SUMMARY OPINION NEGATIVE SECTOR FACTORS POSITIVE SECTOR FACTORS MOODYS RELATED RESEARCH APPENDIX Analyst Contacts:
SAN FRANCISCO 1.415.274.1700

1 2 12 17 18

This outlook expresses Moodys expectations for the fundamental credit conditions in the industry over the next 12 to 18 months and is not a prediction of the expected balance of rating changes during this timeframe.

Summary Opinion
Moodys is maintaining its negative outlook for the U.S. Not-For-Profit Healthcare industry. The outlook was first revised to negative from stable in November 2008, and has remained negative for the last three years because various economic and regulatory risks remain elevated compared to the pre-2008 period. While performance within the sector is expected to remain variable in 2012, with certain organizations performing well despite the challenges, the preponderance of credit factors facing the industry is unequivocally negative, and is expected to remain negative for at least the next several years. The negative outlook in 2012 is based on modest projections for hospital revenue growth over the next 18 months, the expectation of ongoing economic softness throughout the country, financial and operating pressures resulting from regulatory changes, and continued balance sheet challenges. Ongoing uncertainty about healthcare reform and severe federal budgetary stress is putting pressure on hospital management teams as they prepare for the coming era of lower reimbursements and different payment schemes under new business models for healthcare delivery. Furthermore, the ongoing sluggish economic recovery remains an unambiguous driver of weaker financial results, manifesting in softer volumes, weaker payer mix, and stressed operating results. Negative factors supporting the outlook include: Pressure on all sources of hospital revenue, including Medicare, Medicaid, and commercial payers Numerous challenges resulting from the transition to a new healthcare delivery model, including changing regulatory requirements, ongoing uncertainty surrounding many elements of healthcare reform, and increased physician employment

Brad Spielman 1.415.274.1719 Vice President-Senior Analyst brad.spielman@moodys.com NEW YORK 1.212.553.1653

Jaleni Thompson 1.212.553.4735 Associate Analyst jaleni.thompson@moodys.com Lisa Goldstein Associate Managing Director lisa.goldstein@moodys.com 1.212.553.4431

John C. Nelson 1.212.553.4096 Managing Director-Public Finance john.nelson@moodys.com

U.S. PUBLIC FINANCE

Ongoing below average economic growth sustaining high unemployment rates, lower rates of healthcare utilization, and an increase in exposure to governmental payers, self pay patients and charity care Continuing balance sheet pressures driven by one or more risks: investment value losses caused by continuing volatility in the equity and bond markets; pension funding obligations; increased exposure to non-cancelable operating leases; negative valuation of swap portfolios; and increased capital spending funded with cash reserves Ongoing trend towards mergers and acquisitions, which on balance is a long-term positive for the industry and provides an exit strategy for bondholders Evidence of strengthening management and governance in the sector as indicated by overall stable financial performance and continued expense reductions Historically low interest rates and low expense growth Growth in state-administered provider fee programs, creating short-term relief from Medicaid reimbursement pressures

Positive factors include:

Negative Sector Factors


Moodys has projected a negative outlook for the not-for-profit health care sector for five of the last ten years. Long term structural change in the sector has favored a minority of larger, well managed hospitals and systems, while creating ever tighter competitive conditions for the majority of smaller, especially free-standing, hospitals. While some years of robust economic growth have stabilized the outlook for the sector, credit trends have been negative and will remain so until the next wave of regulatory and business model changes are more clearly established in coming years. The following discusses four of the most negative factors we see affecting the sector for 2012.

Pressure on All Sources of Hospital Revenue, Including Medicare, Medicaid, and Commercial Payers: Hospitals Are Threatened with Rate Reductions on All Fronts
Hospitals are faced with an unprecedented threat to revenues. According to the Centers for Medicare and Medicaid Services (CMS), healthcare spending in the U.S. grew in 2009 and 2010 at the lowest rate in the 51 years that these data have been tracked. The low rate of growth reflects lower utilization and lower patient care spending overall. For the not-for-profit hospital sector, this is reflected in the lowest revenue growth rate in two decades (see Figure 1). In 2012 and 2013, we expect revenue growth to continue to be weak and not able to keep pace with normal spending inflation, representing the single most significant challenge that hospitals currently face. A robust increase in 2014 is expected if the individual insurance mandate under health care reform is not ruled unconstitutional.

JANUARY 25, 2012

OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

FIGURE 1

Revenue Growth Rate Hits Ten Year Low in 2010, and Is Expected to Remain Modest for at Least the Next Three Years
Total Operating Revenue Median Growth Rate 10% 9% 8% 7% 6% 5% 4% 3% 2% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Forcasted Growth Rates

Source: Moodys Mid-Year Outlook and Not-for-Profit Hospital Medians, August 2011

In 2012, we expect all sources of hospital revenue to be pressured (see Figure 2). Medicare funding faces building pressure for cuts due not only to provisions in the healthcare law, but also due to efforts to reduce the federal budget deficit. Medicaid in 2011 experienced significant reductions in many states, and as most states remain under budget pressure, Medicaid is likely to be a source of further savings in many state budgets. Commercial insurers face stabilized prospects in the near term, 1 but continue to seek bargaining leverage over hospitals. We expect commercial payers to remain highly aggressive in negotiating lower reimbursement rates with hospitals in 2012.
FIGURE 2

All Hospital Revenue Sources Under Pressure

Private Insurance 43%

Medicare 44%

Medicaid 13%

Source: Moodys Mid-Year Outlook and Not-for-Profit Hospital Medians, August 2011

Medicare Under Federal Funding and Reform Pressure


In fiscal year (FY) 2011, Medicare rates declined for the first time since 1998 (see Figure 3). In FY 2012, while there has been a slight uptick in the rate paid to hospitals, the increase is modest. In FY 2013, the change in rates is likely to be close to zero, or be negative. Other programs under federal
1

Moodys: US Healthcare Insurers: Outlook to Stable from Negative, January 2012 (138730)

JANUARY 25, 2012

OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

jurisdiction, including disproportionate share funding (DSH), critical access designation, and sole community provider status are coming under increased scrutiny. The use of Recovery Audit Contractor (RAC) audits, first authorized in 1996 to seek recovery of excessive reimbursement payments to healthcare providers, has increased in the last few years. Overall, federal funding of healthcare is expected to decline over the next several years.
FIGURE 3

Medicare Growth Rates Drop in 2011; Slight Uptick in 2012


Market Basket Update 4.0 3.5 3.0 Payment Increase

% Increase

2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0

FY97 FY98 FY99 FY00 FY01 Source: Centers for Medicare and Medicaid Services

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

Medicare comprises an average 43% of hospital gross revenue (based on Moodys medians for FY 2010), representing by far the largest single source of revenue for hospitals, leaving hospitals highly vulnerable to changes in Medicare reimbursement. In federal fiscal year (FFY) 2011 and FFY 2012 Medicare made adjustments to the rates to recollect on presumed overpayments that occurred in 2008 and 2009. These adjustments took the form of a 5.8% reduction in payments, 2.9% of which was applied in FFY 2011, with the remaining 2.9% was applied to FFY 2012. In FFY 2011, the market basket 2 increase for inflation was 2.6%. However, there was a 0.25% decrease required under healthcare reform, and including the 2.9% overpayment penalty, the reimbursement rate overall declined by 0.4%. This was the first overall reduction to Medicare rates since the highly disruptive Balanced Budget Act of the late 1990s. In FFY 2012, which began October 1, 2011, Medicare rates increased by 1%. The rates included a negative 1.1% adjustment relating to healthcare reform, and an unexpected positive one time 1.1% increase resulting from the settlement of litigation. In FFY 2013, rates will include further reductions related to healthcare reform (including measures penalizing hospitals for high readmission rates and tying more reimbursements to bundled payments see the shaded box below), as well as possible additional reductions relating to the effort to reduce the budget deficit. Combined with the market basket adjustment, we expect changes to rates in FY2013 to be flat or negative. Significant Medicare cuts to physicians have been debated annually for many years and remain a threat until a permanent resolution to the formula for physician payments has been established. As hospitals increase physician employment, provide income guarantees, or in other ways economically align with physicians, reductions to physician reimbursement may be increasingly passed through to hospitals.

The Market Basket is a proxy for inflation (https://www.cms.gov/MedicareProgramRatesStats/downloads/info.pdf). For many years, the increase to the Medicare reimbursement rate has at best been equal to the market basket rate. In 8 of the last 16 years, it has been less.

JANUARY 25, 2012

OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

The expansion of RAC reviews means that more hospitals face the rising risk of repaying previous reimbursements back to Medicare. Many hospitals view these repayments as a form of ongoing reductions in Medicare payments, rather than one-time or non-recurring repayments. Additionally, the audits have advanced to include reviews of medical necessity. In many states Medicaid has followed suit, with its own version of RAC audits.
Bundled Payments Become Available Under Medicare, Harbinger of a New Payment Paradigm

Bundled payments, also known as episode based pricing, refers to the practice of issuing a single bill related to an episode of care, rather than charging separately for each of the various components of care that a procedure may entail. For example, traditionally, a heart bypass procedure may result in multiple charges from both the hospital and the various physicians involved. Bundled payments replaces this with a single charge, with the intention of better aligning payments with the entire suite of services delivered in a particular episode of care. In 2011, CMS introduced the Bundled Payments for Care Improvement initiative, which was made possible by the Affordable Care Act, and allows hospitals to apply to receive bundled payments for certain procedures. The program is intended to give doctors and hospitals new incentives to coordinate care, improve the quality of care, and save money for Medicare by lowering the cost of care. This pilot program is likely a precursor of payment schemes to be applied to Accountable Care Organizations, and to become more widely prevalent under Medicare. Furthermore, other versions of this payment methodology are currently being more widely tested by commercial payers. Hospitals that are wellaligned with their physicians, and are implementing systems that can satisfy the requirements of these programs, stand the best chance to successfully adapt to the payment paradigm.

Medicaid Faces State and Federal Funding Pressure


Medicaid represents 11% of gross revenues for hospitals on a median basis, and on average pays just 72% of Medicare rates for the same services. For many urban safety net, rural and childrens, hospitals, Medicaid dependence is far higher, often above 20%. 3 Medicaid is a shared federal-state government program and generally ranks as the second or third largest budget item for states. In 2011, a number of states implemented significant reductions in Medicaid spending (see Figure 4). Many of these measures will not reach full impact until 2012, exacerbating the pressures hospitals already experienced in 2011. Furthermore, we expect States to take additional measures in 2012 to address ongoing budget deficits, widening the geographic range where these measures have been felt.

Moodys Medicaid Funding Cuts Add to Credit Strain for U.S. Not-For-Profit Hospitals, July 2011 (134594)

JANUARY 25, 2012

OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

FIGURE 4

Notable Recent Reductions to Medicaid Reimbursement Rates


State Medicaid Cuts Effective July 1, 2011

Arizona Florida N. Carolina Oregon Pennsylvania S. Carolina S. Dakota Texas Washington

5% for hospitals and doctors in April, another 5% in October 12% for hospitals 7.3% for hospitals 11% for hospitals 4% for hospitals 2% - 5% for physicians, on top of 3% for hospitals and doctors in April 11.5% for hospitals, 4.5% - 5.1% for physicians 8% for hospitals 10% for hospitals

Source: Kaiser Health News, A Dozen States Slice Medicaid Payments to Doctors, Hospitals, July 2011

Medicaid cost cutting initiatives take various forms. Measures include reduction in the reimbursement rate, narrowing of eligibility requirements, reduction of the types of services covered, and changes in the payment structure itself. States where some of the biggest reductions have taken place to date include Washington, Oregon, South Dakota, Florida, and Arizona, all of which saw reductions of Medicaid reimbursements rates of 10% or greater. Many states, in addition to reducing the reimbursement rate, have also taken other measures such as reducing eligibility requirements, and restricting the services that are covered. In many states, total net reductions have been significant. Hospital operating performance in 2011 would have been worse without the temporary extension of federal stimulus funding provided to states for Medicaid under the American Recovery and Reinvestment Act (ARRA). As part of the federal ARRA program, the federal government provided stabilization funds to states along with a temporary increase in the Medicaid cost-sharing ratio (the Federal Medical Assistance Percentage, or FMAP), which provided near term fiscal relief to states and helped them to close budget gaps. In 2009, 2010, and 2011 hospitals benefited from these funds as many states avoided further cuts to Medicaid programs. In June 2011, this source of funding terminated, which has contributed additional stress on many state budgets 4. Overall, over the next 12 to 18 months, we expect states to continue to face very significant budget gaps, and for Medicaid programs to come under closer scrutiny.

Commercial Payers Continue to Drive Lower Rate Increases Under Hospital Contracts
We expect hospitals to continue to see lower rate increases in their contracts with commercial healthcare insurers, continuing a multi-year trend. Payers have consolidated over the past several years with other for-profit as well as not-for-profit healthcare insurers, providing greater negotiating leverage for the payer. In most markets dominated by large payers, hospital commercial reimbursement rates are lower than average. Payer consolidation typically results in patients shifting into larger plans that are less profitable to the hospital. Recent rate increases to hospitals from commercial payers have reportedly declined to the low-mid single digit range, depending on the market. Although merger and acquisition activity within the insurance industry has been limited over the last year, financial challenges faced by smaller healthcare insurers and added pressure on insurers from healthcare reform could lead to greater consolidation in the industry.
4

Moodys Medicaid Funding Cuts Add to Credit Strain for U.S. Not-For-Profit Hospitals, July 2011 (134594)

JANUARY 25, 2012

OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

Numerous Challenges Resulting from the Transition to a New Healthcare Delivery Model: New Healthcare Paradigm Presents Challenges on Multiple Fronts
The healthcare industry is undergoing a period of fundamental transformation in which the very model of healthcare delivery is being questioned and changed. Hospitals are facing numerous challenges resulting from the transition to a new healthcare delivery model, and will need to adjust to a changing regulatory environment, ongoing uncertainty surrounding many elements of healthcare reform, and challenges resulting from increased physician employment. These interrelated changes are stressing hospital performance in the short term, and will be significant in 2012. Healthcare reform is being implemented even while components of the act are under dispute. Reductions to Medicare are now in their second year, the pilot Accountable Care Organization program is under way, and additional measures relating to readmission rates and bundled payments are expected to take effect in FFY 2013 (see Figure 5). Nevertheless, the individual mandate provision under the law remains under legal challenge, and multiple other aspects await definition and implementation. Furthermore, even in the absence of healthcare reform, it is likely that significant changes to reimbursement rates and methodologies will take place. Organizations are beginning to invest in new systems and approaches, although the final destination of healthcare reform is far from clear. There may be advantages for hospitals that are early adopters of new models, but investment in initiatives which are later discontinued can contribute to organizational waste, prove to be a distraction for management, and result in misguided strategies.
FIGURE 5

Hospitals With High Medicare Readmission Rates Face Loss of Revenue Under Reform
Medicare 30-Day Hospital Re-Admissions By State As A Percent Of Admissions
25

20

15

10

Source: Commonwealth Fund: State Scorecard Data Tables, October 2009

In addition to healthcare reform, there are other regulatory initiatives taking affect that impact hospitals. Chief among these is the implementation of ICD-10, which relates to the coding of diagnosis, and which will require substantial investments in data management systems. This significant change, which will take effect October 1, 2013, involves expanding the total number of diagnosis codes from 14,000 to over 68,000, and expanding the total number of procedure codes from 4,000 to over 87,000. Hospitals will require a significant investment in staff, training and systems over the next year and have to be ready in time for the compliance deadline. An additional short-term stress on hospitals is the substantial increase in physician-hospital alignment in recent years. The short term negative credit impact of ramping up physician employment can be

JANUARY 25, 2012

DC NV WV AR LA OK DE KY MI MD OH IL PA MA TX KS NJ TN AZ RI IN MO NY GA MS AL AK CT NH VA FL CA NC SC ME HI MN NM WA WI WY IA CO ND MT VT ID NE SD UT OR U.S.
OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

significant because the main benefits of the strategy might only emerge over a longer period, while the costs are effectively immediate, possibly causing material stress on operations in 2012 and 2013. There are often high initial costs involved with new physician employment-- salary guarantees, physician integration, or even practice acquisition. According to the American Hospital Association, direct employment of physicians has reached an all-time high, increasing by 32% since 2000, and reaching 212,000 nationwide in 2011 5. Hospital physician alignment can have significant strategic advantages. In addition to providing a more strategic platform for success under new bundled payment federal policies, better alignment can help ensure stable volumes, increase the quality and size of certain programs, increase market share, and help organizations diversify beyond hospital-based operations. Movement towards increased alignment is accelerating due to increased interest from both physicians and hospitals to adjust strategically to ongoing sector stresses as well as the post-reform era. Drivers of hospital-physician alignment include: decreased reimbursement for physicians; increased competition among hospitals; overall shortages in certain sub-specialties; the ongoing difficulty for smaller hospitals (and hospitals in certain geographic regions) to find and retain physicians; and, the anticipation of needing to accommodate bundled payment requirements. Although physician employment is a dominant strategy, hospitals are using a variety of strategies such as the joint ownership of ancillary services, the use of management contracts, the use of IT systems, and the provision of other services from which physicians benefit. Similarly, hospital-physician alignment strategies require ongoing investment, which is difficult for smaller hospitals to support.
Not-for-Profits Hospitals Continue to Face Tax-Exemption Scrutiny

As the economy continues its sluggish recovery, the ongoing budgetary pressure on many municipalities has raised the scrutiny over the benefits of tax-exemption that not-for-profits enjoy. This scrutiny includes examination of the benefits of their tax-exempt status, including tax benefits granted to hospital donors, holders of tax-exempt debt, and hospitals tax exemptions on investment income, property values, and revenue. Most recently, the State of Illinois review of the property tax exempt status of not-for-profit hospitals was largely driven by a view that the hospitals are providing inadequate levels of charity care. The revocation of a hospitals property tax exempt status is a credit negative because it would create another liability in an already challenged sector. 6 We expect other states are following the developments in Illinois closely. Likewise, levels of charity care will be closely monitored if the individual mandate for healthcare insurance is not deemed unconstitutional and notfor-profit hospitals see a reduction in their charity care levels.

Ongoing Below Average Economic Growth: Causes Lower Patient Volumes and Less Favorable Payer Mix Measures
The economy has experienced elevated unemployment since the 2008-09 crisis (see Figure 6), which we expect will continue to pressure volume and payer mix measures for the next 12 to 18 months. In some states, and within some regions, the rate of unemployment is much higher, with significant ramifications for the local healthcare industry. In general, hospitals will continue to feel the impact of higher unemployment, reduced personal income earning expectations, changes in attitude towards accessing healthcare, and diminished access to private insurance. The U.S. economy remains fragile with forecasts for GDP remaining below historical averages. In its fourth quarter 2011 update,

5 6

http://www.hhnmag.com/hhnmag/HHNDaily/HHNDailyDisplay.dhtml?id=1970001363 Moodys Revocation of Property Tax Exemption is Credit Negative for Illinois Not-for-Profit Hospitals, November 2011 (137096). Also see Not-for-Profits Face Growing Tax Risk in The Great Credit Shift: US Public Finance Post Crisis, September 2011 (136136)

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OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

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Moodys Macroeconomic Board noted that per the OECD Consumer Confidence Index, business and consumer confidence has weakened to levels that normally occur during a recession.
FIGURE 6

U.S Monthly Unemployment Rate (2008-2011)


Number unemployed 15 Unemployment rate 10.1 9.5 8.9 13 7.3 11 5.6 9 7 4.9 5.0 6.1 6.5 8.2 9.7 10.0 9.7 9.9 9.5 9.6 9.6 9.4 11 9.2 8.9 9.0 9.1 8.9 10 8.5 9 8 7 6 5 4

# Unemployed (millions)

Jan-08

Jul-08

Apr-10

Jan-09

Jul-09

Jan-11

Jul-11

Oct-08

Oct-09

Oct-10

Apr-08

Source: United States Bureau of Labor Statistics

The primary effects of a weaker economy on hospitals include: Lower patient volumes as patients defer elective healthcare services Rising charity care and bad debt expense due to a high level of unemployment and the loss of - or reduction in - health insurance Budget pressure on federal and state levels resulting in reduced Medicare and Medicaid reimbursement rates, and intensified reviews on use Unfavorable changes in payer mix away from commercial payers Financial pressures and decreasing membership at healthcare insurers, contributing to lower commercial rate increases for hospitals

While broad economic factors are likely to affect most hospitals in the industry, not-for-profit hospitals may face greater challenges than for-profit hospital companies, primarily because on average not-for-profit hospitals have greater reliance on governmental (Medicare and Medicaid) funding and are at greater risk to the increase of charity care and bad debt. For-profit hospital companies have larger revenue bases and more geographic diversity than many not-for-profit hospitals and health systems, which reduces the impact of the economic forces and state Medicaid funding cuts in any one state. Patient volumes are particularly vulnerable to the state of the economy. The weaker economy has resulted in higher insurance co-pays and deductibles for employees with employer-provided health insurance, or the loss of healthcare insurance for those affected by layoffs or by employers dropping coverage. As a result, demand for discretionary healthcare has declined, particularly for surgeries, as patients defer elective or non-emergent procedures. Additionally, growth in observation cases continues to be a trend, replacing more profitable admissions cases and directly affecting hospital revenue. Growth in observation cases is due to stricter classification of patients by Medicare and commercial payers as well as hospitals adjusting patient classifications in response to RAC audits.

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Apr-09

OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

Oct-11

Jan-10

Jul-10

Apr-11

% Unemployed

U.S. PUBLIC FINANCE

Looking forward, volume and payer mix pressures in 2012 are likely to continue. In many cases hospitals will likely fail to achieve the volume levels reached previously, and the payer mix of those volumes will remain less favorable. Certain hospitals will indeed benefit at the cost of others as market share among competing hospitals shift. Nevertheless, the overall utilization of healthcare services will remain suppressed for the next 12 to 18 months. Over the longer term, we expect some pick up in inpatient volumes as the population continues to age, but we do not expect a return to the growth levels prior to the recession.

Continuing Balance Sheet Pressures Driven by One or More Risks: Volatile Equity and Debt Markets Combined with Costs of Pensions, Leases and Capital Projects Elevate Risk
Balance sheets have continued to come under pressure due to investment volatility, growing pension obligations, increased exposure to non-cancelable operating leases, the negative valuation of swap portfolios, and an increase in capital spending funded with cash reserves. While the balance sheets of some organizations strengthened in 2011, we expect the pressures affecting balance sheets to continue in 2012, and to provide additional sources of instability, stress, and uncertainty. Equity market volatility was a particular source of stress in 2011 (see Figure 7). Investment volatility stresses liquidity measures, can challenge leveraged balance sheets, and increases the difficulty in predicting organizational income. It can also stress pension liabilities, stress pension funding requirements, and overall, increase the level of uncertainty in the general operating environment. The specter of continued investment volatility may make it more difficult for organizations to plan strategic investment, and make other strategic decisions.
FIGURE 7

High Equity Market Volatility Increases Stress


S&P 500 Index Over Last 12 Months:
1400 1350 1300 1250 1200 1150 1100 1050 1000

Jan-11

Jun-11

Jul-11

Oct-11

Mar-11

Aug-11

Source: Standard & Poor's (www.standardandpoors.com)

Hospitals retain elevated exposure to banks and bank agreement renewal risk. A particular concern in 2011 was the large dollar amount of standby bond purchase agreements and letters of credit that were due for renewal. Experience to date with this has been largely positive, with a large number of organizations extending liquidity agreements well in advance of expiration dates 7. Many organizations now have agreements which have expiration dates that are better staggered over time, are with a greater diversity of banks, and have improved covenants. Nevertheless, the hospital industry still has greater
7

Moodys US Muni Sector Keeping Pace With Bank Facility Expirations, November 2011 (137095)

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May-11

OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

Nov-11

Dec-11

Feb-11

Apr-11

Sep-11

U.S. PUBLIC FINANCE

exposure to put risk than it did prior to 2008 and challenges with respect to this debt remain. In addition to a number of banks being downgraded in 2011, bank consolidation and the departure of certain banks from this subsector have decreased the number of banks that hospitals can work with. This creates significant potential demand on hospital liquidity. Furthermore, many organizations acquired new exposure to banks in 2011 in the form of bank direct loans. These loans often carry covenants that are similar to LOCs, and carry the same kind of renewal risk. Moodys treats these agreements as putable debt, and although in most cases we do not rate the debt, we nevertheless review the agreements where ever possible in order to determine their impact on long term bond holders. Another area of significance is the underfunding of pensions. The funded status of pension obligations has remained low over the last three years due to unfavorable changes in discount rates, and the depreciation of the value of pension assets (see Figure 8). The funded status of many programs remains well below 80% on a Projected Benefit Obligation (PBO) basis. Consequently, pension expense is increasing for many organizations, and actual contributions to the pension plans may in fact be even greater. The dollar amount of pension liabilities at many organizations represents a significant increase to their total debt.
FIGURE 8

Underfunded Pensions Stress Balance Sheets


Median Pension Funded Ratio (%) Per GAAP* 82% 80% 78% 76% 74% 72% 70% 2008 2009 2010

*Sample includes 225 hospitals and health systems with a defined pension benefit plan Source: Moodys

Other demands on liquidity stem from the perseverance of large swap programs. Although many hospitals have refinanced variable rate bonds into fixed rate bonds, some have chosen to leave orphan swaps outstanding in order to avoid large termination payments. The result is that many organizations remain exposed to the possibility of needing to fund large swap collateral calls, which for certain organizations, exceeded $100 million at various times in the last three years. Certain organizations which have unwound their swap programs have done so at the cost of reducing cash, or taking on additional debt. In 2009 and 2010, hospitals dramatically reduced capital spending and cut back on projects in an effort to conserve capital (see Figure 9). Anecdotally, in 2011, we saw a number of hospitals resume projects and return to an increased level of spending. Compared to past patterns, a greater portion of this increased spending is being funded from cash holdings, as opposed to debt borrowings. While this strategy protects current debt service coverage requirements, it reduces the balance sheet cushion and may reduce liquidity, weakening cash to debt measures. Alternatively, hospitals are funding projects with non-cancelable operating leases. Moodys treats non-cancelable operating leases as debt, and an

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OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

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increase in these commitments will still stress debt measures. Accounting changes for operating leases to assign a debt equivalent to these transactions is scheduled to take affect which make these transactions more transparent.
FIGURE 9

Spending on Capital Decreases in an Effort to Preserve Liquidity


1.6 1.5 1.4 1.3 1.2 1.1 1.0 2006 2007 2008 2009 2010

Source: Moodys Mid-Year Outlook and Not-for-Profit Hospital Medians, August 2011

Positive Sector Factors


Many hospitals and systems have managed to keep ahead of ongoing negative credit pressures in this sector by pursuing forward looking strategies and timely investments that have resulted in consistently strong operating results. The following discusses the main positive credit factors affecting hospitals that will continue to allow some hospitals to perform well in 2012.

Ongoing Trend Towards Mergers and Acquisitions: Creates Positive Credit Effects for Affected Hospitals and an Exit Strategy for Bondholders
Merger and acquisition activity increased significantly in 2011, impacting numerous organizations and even changing the overall competitive landscape in certain markets. We expect this accelerated rate of consolidation activity to continue in 2012 and 2013, due to ongoing revenue pressures in the industry, the perceived benefits of economies of scale, and the increased challenges that many smaller hospitals are facing (see Figure 10). This development, on balance, is a positive trend for the industry, notwithstanding the short-term implementation risk and increased competition some individual health systems will face.
FIGURE 10

U.S. Not-For-Profit Healthcare Outlook Remains Negative for 2012


Increased need for capital relating to plant modernization and IT systems

Greater limitations on access to capital due to wider credit spreads for lower rated credits Cost of compliance with changing regulatory environment and new requirements under health care reform Increased reimbursement pressures across all payers Large unfunded pension liabilities Possibility that benefits of tax-exemption will further diminish Benefits of economies of scale, including increased bargaining power with suppliers, payers, and labor

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OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

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The benefits from consolidation are numerous. In an environment where organic growth is becoming increasingly difficult, consolidation offers opportunity for organizations to grow the revenue base. Consolidation can improve competitive positions and negotiating leverage with payers and suppliers, improve operating efficiency and lower per unit costs, and improve clinical care quality outcomes. For investors holding debt of acquired hospitals, consolidation may result in an increase in the credit quality of their bonds, because the acquiring hospital is often higher rated, or an exit strategy at full par if the debt is refinanced. The mergers and acquisitions that have been announced or concluded in recent years cover a wide variety of types of organizations and markets (see Figure 11). The year 2010 saw the entrance of nontraditional investors into not-for-profit healthcare, with for-profit Vanguard Health System (B2) acquiring Detroit Medical Center (rated Ba3), and with Cerberus Capital Management, a private equity investment firm, acquiring Caritas Christi Health Care (rated Baa2). In 2011, a significant development was the announced merger of the Catholic, multi-state system Providence Health and Services (rated Aa2), with the Seattle based, market leading, secular, Swedish Health Services (rated A2). Other developments involved the expansion of regional markets (Meritcare, rated A2 with Sanford Health, rated A1, in the Dakotas), and the much more traditional acquisition of smaller hospitals by larger systems. Also of interest is the proposed merging of three organizations from quite disparate healthcare sectors along the Colorado front range, namely: academic medical center University of Colorado (rated A3), publically owned Memorial Hospital (rated A3), and community provider Poudre Valley Healthcare (rated A2). We expect organizations to remain creative in contemplating the types of organization they are willing to partner with, and for the industry to continue to consolidate in new and different ways.
FIGURE 11

Notable Recent Mergers and Acquisitions


Organization (Rating) Type of Transaction Status

IL, Provena Health (Baa1/Stable) IL, Resurrection Health Care System (Baa1/Stable) Cerberus Capital Management/ MA, Caritas Christi Health Care System (Baa2/Stable*) Vanguard Health Systems (B2/stable)/ MI, Detroit Medical Center (Ba3/Negative*) MI, Trinity Health (Aa2/Stable)/ IL, Loyola University Health System (Baa3/Positive*) MO, Ascension Health Credit Group (Aa1/Negative)/ IL, Alexian Brothers Health System (A3/Stable) PA, Highmark (Baa1/stable)/ PA, West Penn Allegheny Health System (Caa1/Negative) SD, Sanford Health (A1/Stable)/ ND, Meritcare Health System (A2/Stable*) WA, Providence Health System (Aa2/Stable)/ WA, Swedish Health Services (A2/Stable) MA, Saints Memorial (Caa1/Watchlist)/ MA, Lowell General Hospital (Baa1/Stable)
Note: *Long-term rating has been withdrawn Source: Moodys

Not-for-profit hospital merger For-profit acquisition For-profit acquisition Not-for-profit hospital merger Not-for-profit hospital merger

Completed Completed Completed Completed Completed

Not-for-profit merger between insurer In progress and hospital Not-for-profit hospital merger Not-for-profit hospital merger Not-for-profit hospital merger Completed In progress In progress

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Notwithstanding the overall benefits in most cases, increased merger and acquisition activity also poses short-term implementation risk for the health systems involved, and can result in increased pressure to the local organizations not involved in the merger.

Evidence of Strengthening Management and Governance: Drives Good Performance for Some
The economic challenges of the last several years have highlighted the differences among organizations, increasing the gap between the strongest and weakest hospitals, and providing the opportunity for organizations with strong governance and management teams to outshine their competitors. The healthcare industry is ripe with examples of organizations that employ best practices with respect to governance, and hospitals with strong management teams have been able to employ effective strategic responses to industry challenges. The strategies that hospitals have employed are varied, and include both expense and revenue measures. Operating strategies include reducing or closing unprofitable services, restructuring the pension plan to a defined contribution from a defined benefit plan, implementing workforce reductions, eliminating bonuses and salary increases, and renegotiating supplies contracts. Revenue cycle strategies include improving patient registration and payment processing, improving coding procedures, and more vigilantly pursing the qualification for state and federal payment programs. In certain markets nursing shortages have eased due to the decreased supply of nursing jobs (as the result of the reduction in FTEs at many providers) and due to the increased supply of nurses (as the result of more reentering the workforce or delaying retirement). We expect the strongest management teams to continue to demonstrate better financial and capital planning capabilities and discipline. Many organizations are now integrating their strategic, financial and capital planning. A number of the more successful organizations have developed several levels of contingency plans to keep on the shelf if needed. In order to preserve liquidity, some healthcare systems delayed major projects that were not already started, halted projects already begun, postponed new equipment purchases and/or re-prioritized projects. Many hospitals have taken this a step further and have permanently changed their approach to capital, replacing capital intensive hospital-based strategies with less costly, more out-patient oriented, vertically integrated approaches.

Low Interest Rates and Reduced Expense Growth: Provides Operating Cost Relief and Borrowing Opportunity
Over the last year interest rates have remained at historically low levels, and they are expected to remain low for the time being. Particularly for organizations with good credit quality, the cost of borrowing is favorable. Organizations have taken this opportunity to either refinance debt, fix out variable rate issuance, or issue new debt at favorable long-term costs of capital. This low rate environment has helped facilitate a move towards more conservative balance sheet structures for many hospitals. An additional positive development that is driven in part by the low inflationary environment is the historically low levels of expense growth experienced in the healthcare sector over the last two years. Moodys data for hospital expenditures shows a decrease in expenditures that has mirrored the reduction in revenue growth (see Figure 12). This has helped hospitals, in many instances, to maintain adequate operating income and acceptable levels of cash flow generation. The decrease in pressure on

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expense growth, and the steps many management teams have taken to proactively further eliminate costs, is a bright spot in the current challenging business climate.
FIGURE 12

Drop In Expense Growth Rate Mitigates Revenue Pressures


8%

7%

Growth Rate (%)

6%

5%

4%

3% 2007 2008 2009 2010

Source: Moodys Mid-Year Outlook and Not-for-Profit Hospital Medians, August 2011

Growth in State-Administered Provider Fee Programs: Creates Short-Term Relief from Medicaid Reimbursement Pressures, but Benefits May Be Short-Lived
The number of states which administer some sort of provider fee or bed tax program has increased significantly in the past couple of years. While the details of such programs differ from state to state, they are generally similar. The state administers a tax on not-for-profit hospitals proportional to the size of the institution. These funds are used to draw down matching federal funds, which are then redistributed to the same pool of hospitals in such a way that those with the greatest exposure to Medicaid and indigent patients are the greatest beneficiaries. Within the program itself, there are generally winners and losers: some hospitals are net payers to the program, while others are net beneficiaries. However, most of these programs include side agreements among the hospitals themselves in which the net payers are made whole by those that benefit under the tax. Thus, in most states, no hospitals actually lose money under the tax, and many benefit from the redistribution of the federal match. While these programs have been in existence in certain states for many years, there has been a significant increase in the number of states administering these programs over the last three years (see Figure 13). Prior to 2008, approximately 15 states operated provider fee programs. As of the end of 2011, this number had grown to a total 32, with another 4 states with a program under consideration.
FIGURE 13

States With Provider Fees


Established States

Pre-2008 Post-2008 In Process*

Florida, Illinois, Kentucky, Kentucky, Massachusetts, Maine, Michigan, Minnesota, Missouri, Mississippi, Montana, New York, Rhode Island, Wisconsin Alabama, Arkansas, California, Colorado, Idaho, Kansas, New Hampshire, Ohio, Oregon, Pennsylvania, Utah, Vermont, Washington, West Virginia, Georgia, New Jersey, Tennessee Indiana, Maryland, North Carolina, Oklahoma

*State is considering provider fee or "bed tax" implementation Source: National Conference of State Legislatures (http://www.ncsl.org/default.aspx?tabid=14359)

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The short term impact of these programs can be very significant. In California, for example, the state passed a program covering a 21 month period of time spanning 2009 and 2010. The program was not approved by CMS until shortly before the program was due to expire, and thus hospitals received funds pertaining to the full 21 month program in a short period of time. The impact of this was very large for many organizations, with some hospitals receiving more than $100 million net benefit. This one program has had a material impact on balance sheets across the state. In those states where the program has been in existence for some time, and is a recurring source of income, the improvement to operating margins can be material. Moodys approach to treating expenses and revenues related to a provider fee program varies by state. For those states in which the program has been implemented on a provisional basis with an end date established, or if the program has been implemented retroactively and funds received relate to prior periods, we do not include funds as part of our base calculation of operating performance. In those states where the program has a strong track record of continued operation, the program is implemented on a permanent basis and it appears as part of the state reimbursement process, Moodys does include the funds as part of operating performance. In all cases, funds received on the balance sheet contribute to balance sheet strength. It may be that 2012 is the peak year for these types of programs and that the benefits will diminish over time. The provider fee programs are vulnerable on several fronts. It is possible that states will divert a portion of these funds away from hospitals and towards other purposes in an effort to fill their expanding deficits (as was the case in Washington State in 2011 see the shaded box below). Hospitals may resist continued participation in these programs, endangering their effectiveness. Also, the Federal Government may begin matching at a lower rate, or discontinue offering the match altogether. Nevertheless, in 2012, the short term benefits of these programs in many states are likely to remain significant.
Washington States Provider Fee Program Shifts from Benefit to Liability in Just One Year

Like many states, in 2010, Washington State implemented a provider fee program. The program took advantage of federal matching opportunities and resulted in additional funding for not-for-profit hospitals. According to the Washington State Hospital Association, the total benefit for hospitals totaled more than $250 million dollars. 8 In 2011, responding to a significant budget deficit, Washington State implemented several measures that reduced support for hospitals, physicians, and other healthcare entities in the state. Among these measures was the decision to divert provider fee funds away from hospitals in order to help plug the deficit. According to the hospital association, the result is that some hospitals will get back only 80 cents for every dollar they pay into the program, turning hospitals from net beneficiaries into net contributors, and turning the fee into a tax. This is exactly what many opponents of hospital fee programs have feared, arguing that once hospitals accept fees, these fees may be used against them. The Hospital Association has filed suit against the State of Washington on this matter, arguing that diversion of the fee was illegal. Overall, the provider fee in the state of Washington has turned from a credit positive into a credit negative. The diversion of provider funds was in addition to a 10% reduction to the Medicaid reimbursement rate, among other measures. The result has been significantly reduced support from the state for hospitals, resulting in reduced profitability for many hospitals in the state.
8

http://www.washingtonstatewire.com/home/10487-hospital_association_gets_set_to_knock_a_110_million_hole_in_the_budget.htm

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Moodys Related Research


Median Report:

U.S. Not-for-Profit Hospital Medians Show Resiliency Against Industry Headwinds But Challenges Still Support Negative Outlook, August 2011 (135387) Achieving Greater Cost and Quality Accountability Will Be Credit Positive for Not-for-Profit Hospitals in Era of Reform, May 2011 (132964) Medicaid Funding Cuts Add to Credit Strain for U.S. Not-For-Profit Hospitals, July 2011 (134594) Hospital Revenues In Critical Condition; Downgrades May Follow, August 2011 (134473) Direct Bank Loans Carry Credit Risks Similar to Variable Rate Demand Bonds for Public Finance Issuers, September 2011 (135849) The Impact of US Federal Fiscal and Economic Strain on Municipal Credits, November 2011 (135447)

Special Comments:

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

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Appendix
Moody's Healthcare Ratings by State (as of December 31, 2011)
Issuer [1]
ALABAMA Baptist Health System Health Care Auth for Baptist Health (The) AL Children's Hospital of Alabama Cullman Regional Medical Center DCH Regional Medical Center Helen Keller Hospital Huntsville Health Care Authority (Huntsville Hospital) Jackson Hospital and Clinic Marshall County Healthcare Authority University of Alabama Hospital at Birmingham ARIZONA Scottsdale Healthcare University Medical Center Corporation Yavapai Regional Medical Center Yuma Regional Medical Center ARKANSAS Arkansas Children's Hospital Baxter County Regional Hospital Washington Regional Medical Center CALIFORNIA Antelope Valley Healthcare District Cedars-Sinai Medical Center Catholic Healthcare West Children's Hospital Central California Childrens Hospital Los Angeles Citrus Valley Health Partners City of Hope National Medical Center Community Hospitals of Central California Community Memorial Health System El Camino Hospital District Eisenhower Memorial Hospital Fremont-Rideout Health Group Hoag Memorial Presbyterian Hospital Good Samaritan Hospital John Muir Health Kaweah Delta Health Care District Loma Linda University Medical Center Baa3 A2 A2 A2 Baa2 Ba2 A1 Baa2 Ba2 A2 Baa2 A2 Aa3 B1 A1 A3 Baa3 Stable Positive Negative Positive Stable Negative Stable Stable Stable Stable Negative Negative Stable Positive Stable Stable Stable A1 Baa2 Baa1 Stable Stable Stable A3 Baa1 Baa2 A2 Positive Negative Stable Stable Baa2 A3 A2 Ba1 A2 Ba1 A1 Baa2 A3 A1 Stable Stable Positive Negative Stable Stable Stable Stable Stable Stable

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
CALIFORNIA Lucile Salter Packard Children's Hospital Palomar Pomerado Health Rady Children's Hospital San Antonio Community Hospital Scripps Health Sharp Healthcare St. Joseph Health System Stanford Hospital and Clinics Sutter Health Torrance Memorial Medical Center Washington Township Health Care District COLORADO Aspen Valley Hospital District Boulder Community Hospital Catholic Health Initiatives Children's Hospital Association Exempla, Inc. (Guaranteed by Sisters of Charity Leavenworth) Longmont United Hospital Memorial Health System Parkview Medical Center Poudre Valley Health Care University of Colorado Hospital Authority CONNECTICUT Hartford Health Care Middlesex Hospital St. Mary's Hospital Yale-New Haven Hospital DELAWARE Christiana Care Health Services Beebe Medical Center DISTRICT OF COLUMBIA, WASHINGTON Sibley Memorial Hospital FLORIDA Adventist Health System-Sunbelt All Children's Hospital Baptist Hospital, Inc. & The Baptist Manor, Inc. Baptist Health South Florida BayCare Health System Bethesda Healthcare System Cape Canaveral Hospital (Guaranteed by Health First) Citrus Memorial Health System Aa3 A1 Baa1 Aa2 Aa3 A3 A3 Ba2 Stable Stable Stable Stable Positive Stable Stable Negative A2 Stable Aa3 Ba3 Stable Negative A2 A2 Ba2 Aa3 Stable Stable Stable Stable Baa3 A2 Aa2 A1 A1 Baa2 A3 A3 A2 A3 Stable Stable Stable Positive Positive Stable Stable Stable Stable Positive Aa2 Baa3 A2 A3 Aa3 A2 A1 Aa3 Aa3 A2 A3 Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Positive

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
FLORIDA Flagler Hospital H. Lee Moffitt Cancer Center Health First Holmes Regional Medical Center (Guaranteed by Health First) Lakeland Regional Health System Lee Memorial Hospital Central Florida Health Alliance South Broward Hospital District Mount Sinai Medical Center Munroe Regional Health System NCH Healthcare North Broward Hospital District Orlando Regional Healthcare System Sarasota Memorial Hospital Shands Jacksonville Medical Center Shands Teaching Hospital and Clinics South Lake Hospital South Lake Hospital (Guaranteed by Orlando Regional Healthcare System) Tallahassee Memorial Regional Medical Center Tampa General Hospital GEORGIA Archbold Medical Center Central Georgia Health Systems Obligated Group Children's Healthcare of Atlanta Gwinnett Hospital System, Inc. Hospital Authority of Valdosta and Lowndes County Houston Healthcare MCG Health, Inc. Memorial Health University Medical Center Phoebe Putney Memorial Hospital Piedmont Healthcare Southeast Georgia Health System St. Joseph's/Candler Health System University Health Wellstar Health System HAWAII Hawaii Pacific Health Kuakini Health System Queen's Health Systems A3 Ba1 A1 Stable Stable Stable A2 Aa3 Aa2 A3 A2 A2 A2 Baa3 Aa3 Aa3 A2 Baa1 A1 Aa3 Stable Stable Stable Positive Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable A3 A3 A3 A3 A2 A2 Baa1 Aa3 Baa3 A3 A2 A2 A2 A1 Baa1 A2 Baa2 A2 Baa1 A3 Stable Stable Stable Stable Stable Stable Stable Stable Positive Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
IDAHO St. Luke's Health System ILLINOIS Advocate Health Care Network Alexian Brothers Health System Anderson Hospital Blessing Hospital DMH Health System Edward Health Services Corporation Elmhurst Memorial Healthcare NorthShore University Health System Hospitals Sisters Services Lake Forest Hospital Foundation (member of Northwestern Memorial HealthCare) Memorial Health System Methodist Medical Center of Illinois Northwest Community Hospital Northwestern Medical Faculty Foundation Northwestern Memorial Hospital OSF Healthcare System Proctor Hospital Provena Health Resurrection Health Care System Riverside Health System Rush University Medical Center Obligated Group Sherman Hospital St. Vincent de Paul Health System (Guaranteed by Ascension Health) University of Chicago Medical Center INDIANA Ball Memorial Hospital Indiana University Health (Formerly: Clarian Health Partners) Elkhart General Hospital King's Daughters' Hospital & Health Services Parkview Health System Riverview Hospital Franciscan Alliance, Inc. (formerly Sisters of St. Francis Health Services) Baa3 A1 A2 Baa2 A1 Baa1 Aa3 Negative Stable Stable Negative Negative Stable Stable Aa2 A3 Baa3 A3 A2 A2 Baa1 Aa2 A1 Aa2 A1 A2 A1 A1 Aa2 A3 Ba1 Baa1 Baa1 A2 A2 Baa2 Aa1 Aa3 Stable Stable Stable Stable Negative Positive Negative Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable Stable Stable Stable Negative Stable A2 Stable

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
IOWA Genesis Health System Iowa Health System Keokuk Area Hospital Mary Greely Medical Center Mercy Hospital Mercy Medical Center (Cedar Rapids) Northwest Iowa Health Center (Guaranteed by Sanford Health) St. Anthony Regional Hospital University of Iowa Hospitals & Clinics KANSAS Hays Medical Center Hiawatha Hospital Association (Guaranteed by Sisters of Charity of Leavenworth Health System) Lawrence Memorial Hospital Med-Map L.L.C. (Guaranteed by Sisters of Charity of Leavenworth Health System) Rural Health Resources of Jackson Co. (Guaranteed by Sisters of Charity of Leavenworth Health System) Salina Regional Health Center Sisters of Charity of Leavenworth Health System Stormont-Vail Health Care KENTUCKY Baptist Healthcare System Obligated Group Hardin Memorial Hospital Jewish Hospital Health Care Services King's Daughters' Medical Center Murray-Calloway County Hospital Owensboro Medical Health System Pikeville Medical Center LOUISIANA East Jefferson General Hospital Franciscan Missionaries of Our Lady Health System Lafayette General Medical Center Ochsner Clinic Foundation Ochsner Community Hospital Terrebonne General Medical Center Touro Infirmary West Jefferson Medical Center Willis-Knighton Medical Center Woman's Hospital Foundation Baa2 A2 A3 Baa1 Baa1 A2 Ba1 Baa2 A3 A3 Stable Stable Stable Stable Stable Stable Stable Stable Positive Stable A1 A2 Baa1 A1 Baa2 Baa2 A3 Stable Stable Negative Stable Stable Stable Stable A2 Aa3 A2 Aa3 Aa3 A1 Aa3 A2 Negative Stable Stable Stable Stable Stable Stable Stable A1 Aa3 Caa2 A2 A2 A2 A1 Baa2 Aa2 Stable Stable Negative Stable Negative Stable Stable Stable Stable

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
MAINE Maine Health & Higher Educ. Facs. Auth. (Reserve Fund Resolution) MaineGeneral Medical Center MARYLAND Adventist Healthcare Mid-Atlantic Anne Arundel Health System Bon Secours Health System Calvert Memorial Hospital Carroll Hospital Center Dimensions Health Corporation Doctors Community Hospital Frederick Memorial Hospital Greater Baltimore Medical Center Howard County General Hospital Johns Hopkins Health System LifeBridge Health MedStar Health Mercy Health Services Peninsula Regional Medical Center Suburban Hospital (Part of Johns Hopkins Health System) Union Hospital Of Cecil County University of Maryland Medical System Upper Chesapeake Health System MASSACHUSETTS Baystate Medical Center Boston Medical Center CareGroup HealthAlliance HealthAlliance Hospital (Guaranteed by UMass Memorial HealthCare) Children's Hospital (Boston) Dana-Farber Cancer Institute Harvard Pilgrim Health Care Holyoke Hospital Home for Little Wanderers Lowell General Hospital Massachusetts Eye & Ear Infirmary Milford Regional Medical Center New England Center for Children Northeast Health System Partners Healthcare System Saints Medical Center A2 Baa1 A3 Baa2 Baa1 Aa2 A1 Baa3 Ba3 Baa1 Baa1 Baa3 Baa3 Ba1 Baa2 Aa2 Caa1 Stable Negative Positive Stable Positive Stable Stable Stable Negative Negative Stable Stable Stable Stable Stable Stable Watchlist Baa2 A3 A3 A3 A3 B3 Baa3 Baa1 A2 Baa1 Aa3 A2 A2 Baa2 A2 Aa3 A3 A2 Baa1 Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable Stable A1 Baa3 Stable Stable

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
MASSACHUSETTS South Shore Hospital SouthCoast Health System UMass Memorial HealthCare Vinfen Corporation MICHIGAN Bronson Methodist Hospital Crittenton Hospital Medical Center Dickinson County Healthcare System Sparrow Obligated Group Garden City Hospital Henry Ford Health System Holland Community Hospital Hurley Medical Center Marquette General Hospital McLaren Healthcare Corporation Memorial Healthcare Mercy Memorial Hospital Corp. Obligated Group MidMichigan Health Munson Healthcare Oakwood Hospital Spectrum Health Trinity Health University of Michigan Hospitals William Beaumont Hospital MINNESOTA Allina Health System Fairview Health Services Hazelden Foundation HealthPartners HealthEast Care System Maple Grove Hospital Mayo Foundation North Memorial Health Care CentraCare Health System MISSISSIPPI Forrest General Hospital Magnolia Regional Medical Center Memorial Hospital North Mississippi Health Services A2 Baa2 A2 Aa3 Positive Stable Stable Stable A1 A2 A3 A3 Ba1 Baa1 Aa2 Baa1 A2 Positive Stable Stable Positive Stable Negative Stable Negative Stable A2 Baa1 Ba1 A1 Ba3 A1 A2 Ba1 Baa3 Aa3 Baa3 Baa3 A1 A1 A2 Aa3 Aa2 Aa2 A1 Positive Negative Stable Stable Negative Stable Stable Stable Stable Stable Stable Positive Stable Stable Stable Stable Stable Stable Negative A3 A2 Baa1 Baa3 Stable Stable Positive Negative

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
MISSOURI Ascension Health BJC Health System Boone Hospital Center Capital Region Medical Center Cox Health Heartland Regional Medical Center Jefferson Regional Medical Center Sisters of Mercy Health System South Barry County Hospital District (Guaranteed by Sisters of Mercy Health System) St. Anthony's Medical Center Saint Luke's Health System, Inc. MONTANA Community Medical Center Northern Montana Health Care St. Peter's Hospital NEBRASKA BryanLGH Medical Center Children's Hospital Obligated Group, NE (Formerly: Children's Healthcare Services) Nebraska Medical Center Regional West Medical Center NEVADA Washoe Barton Medical Clinic (Guaranteed by Barton Healthcare System) Renown Regional Medical Center NEW HAMPSHIRE Catholic Medical Center Concord Hospital Elliot Hospital Exeter Hospital Memorial Hospital at North Conway NEW JERSEY AtlantiCare Regional Medical Center (formerly Atlantic City Medical Center) Atlantic Health System Cape Regional Medical Center (formerly Burdette Tomlin Memorial Hospital) CentraState Medical Center Children's Specialized Hospital Chilton Memorial Hospital Clara Maass Medical Center (Guaranteed by Saint Barnabas Health Care System) Community Medical Center/Kimball Medical Center/Kensington Manor Care Center (Guaranteed by Saint Barnabas Health Care System) Cooper Health System A1 A1 A3 Baa1 Baa3 Baa1 Baa2 Baa2 Baa3 Stable Stable Stable Stable Stable Stable Positive Positive Stable Baa1 A2 Baa1 A2 Baa3 Stable Stable Stable Stable Stable Baa2 A3 Stable Negative A1 A2 Aa3 Baa1 Stable Stable Stable Stable Baa2 Baa3 A3 Stable Stable Positive Aa1 Aa2 A3 A3 A2 A2 Baa2 Aa3 Aa3 A2 A1 Negative Stable Stable Stable Stable Positive Positive Stable Stable Stable Stable

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
NEW JERSEY Deborah Heart & Lung Center Hackensack University Medical Center Holy Name Hospital Kennedy Memorial Hospital University Medical Center Newton Memorial Hospital Palisades Medical Center of the New York Presbyterian Health System Robert Wood Johnson University Hospital at Rahway Robert Wood Johnson University Hospital Saint Barnabas Health Care System Saint Joseph's Health System Saint Peter's University Hospital Shoreline Behavioral Health Center (Guaranteed by Saint Barnabas Health Care System) Somerset Medical Center South Jersey Hospital System Trinitas Regional Medical Center (formerly St. Elizabeth Hospital/Elizabeth General Hospital) NEW MEXICO Presbyterian Healthcare Services San Juan Regional Medical Center NEW YORK Arnot Ogden Medical Center Catholic Health Services of Long Island Health Quest Systems Highland Hospital Huntington Hospital Lenox Hill Hospital Memorial Sloan Kettering Cancer Center Mount Sinai Hospital New York Methodist Hospital North Shore-Long Island Jewish Health System NYU Hospitals Center Orange Regional Medical Center (formerly Arden Hill Hospital-Horton Medical Center) Siena Village (Guaranteed by Catholic Health Services of Long Island) St. Catherine of Siena Medical Center (Guaranteed by Catholic Health Services of Long Island) St. Peter's Hospital Staten Island University Hospital Westchester County Health Care Corporation Winthrop-South Nassau University Health System Baa1 A3 A3 A2 Baa1 Baa3 Aa2 A2 Baa3 A3 Baa1 Ba1 A3 A3 Baa2 Baa3 A3 Baa1 Negative Stable Stable Stable Stable Positive Stable Stable Positive Stable Positive Stable Stable Stable Positive Stable Stable Stable Aa3 A3 Stable Stable B1 A3 Baa2 A3 A1 Ba2 Ba3 A2 Baa2 Ba1 Baa3 Baa2 Ba2 A2 Baa3 Stable Stable Stable Stable Stable Stable Stable Stable Positive Stable Negative Positive Stable Stable Stable

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
NORTH CAROLINA Blue Ridge Healthcare System Charlotte-Mecklenburg Hospital Authority (d/b/a Carolinas Healthcare System) Cumberland County Health System (d/b/a Cape Fear Valley Health System) Duke University Health System FirstHealth of the Carolinas Gaston Memorial Hospital (d/b/a CaroMont Health) Halifax Regional Medical Center Mission St. Joseph's Health System New Hanover Regional Medical Center North Carolina Baptist Hospitals Northern Hospital District of Surry County Novant Health Rex Healthcare Union Regional Medical Center (d/b/a Carolinas Medical Center-Union) University Health Systems of E. Carolina University of North Carolina Hospitals Wake Forest University Health Sciences WakeMed Wayne Memorial Hospital NORTH DAKOTA Altru Health System OHIO Adena Health System Blanchard Valley Regional Health Center Catholic Healthcare Partners Nationwide Children's Hospital Children's Hospital Medical Center of Akron Cleveland Clinic Health System Doctors OhioHealth (Guarantee by OhioHealth) East Liverpool City Hospital Fairview Health System (Member of Cleveland Clinic Health System) Fairfield Medical Center Firelands Regional Medical Center UC Health Kettering Medical Center Network Obligated Group Lake Health Lakewood Hospital (Affiliate of Cleveland Clinic Health System) Marietta Area Health Care MetroHealth System Miami Valley Hospital A2 A3 A1 Aa2 A1 Aa2 Aa2 Ba1 Aa2 Baa2 Baa2 Baa1 A2 Baa1 Baa2 Ba2 A3 Aa3 Stable Stable Positive Stable Stable Stable Stable Negative Stable Stable Positive Positive Negative Positive Negative Negative Negative Stable Baa1 Stable A3 Aa3 A3 Aa2 Aa3 A1 Ba3 Aa3 A1 Aa3 Baa3 A1 A1 A2 A1 Aa3 Aa3 A1 A2 Stable Stable Stable Stable Stable Positive Negative Stable Stable Stable Stable Stable Stable Watchlist Stable Stable Stable Stable Stable

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
OHIO OhioHealth ProMedica Health System Robinson Memorial Hospital Southern Ohio Medical Center Southwest General Hospital St. Luke's Hospital (Part of ProMedica Health System) Summa Health System Trinity Health System UHHS/CSAHS-Cuyahoga, Inc. & CSAHS/UHHS-Canton, Inc. University Hospitals Health System Upper Valley Medical Center OKLAHOMA Integris Health Norman Regional Hospital Authority Saint Francis Health System St. John Medical Center Stillwater Medical Center OREGON St. Charles Health System Legacy Health System PENNSYLVANIA Allegheny General Hospital (Guaranteed by West Penn Allegheny Health System) Albert Einstein Healthcare Network Butler Health System Catholic Health East Chester County Hospital Children's Hospital of Philadelphia Community Medical Center Crozer-Chester Medical Center Doylestown Hospital Excela Health Forbes Health System (Guaranteed by West Penn Allegheny Health System) Geisinger Health System Foundation Good Samaritan Hospital Good Samaritan Medical Center of Johnstown (Guaranteed by Memorial Medical Center) Hamot Health Foundation (Now UPMC Hamot) Hazleton General Hospital Hazleton-St. Joseph Medical Center (Guaranteed by Hazleton General Hospital) Heritage Valley Health System (formerly Valley Health System) Holy Redeemer Hospital Jefferson Health System Caa1 Baa1 Baa1 A2 Ba1 Aa2 Baa3 Baa3 Baa2 A3 Caa1 Aa2 Ba1 Baa1 Aa3 Baa3 Baa3 A1 Baa2 Aa3 Negative Negative Stable Stable Negative Stable Stable Stable Negative Stable Negative Stable Stable Stable Positive Stable Stable Stable Negative Stable A3 A2 Positive Stable Aa3 Ba1 Aa2 A3 Baa1 Stable Stable Stable Positive Stable Aa2 Aa3 A3 A2 A2 Aa3 Baa1 A3 Baa3 A2 A2 Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Stable

Long-Term Rating [2]

Outlook [3]

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Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
PENNSYLVANIA Jefferson Regional Medical Center KidsPeace, Inc. Lancaster General Hospital Lehigh Valley Health Network Lewistown Hospital Lower Bucks Hospital Memorial Medical Center Monongahela Valley Hospital Ohio Valley General Hospital Pinnacle Health Reading Hospital And Medical Center St. Vincent Hospital Summit Health St. Luke's Hospital and Health Network Temple University Health System University of Pennsylvania Health System University of Pittsburgh Medical Center The Washington Hospital WellSpan Health West Penn Allegheny Health System Western Pennsylvania Hospital (Guaranteed by West Penn Allegheny Health System) Windber Medical Center of Johnstown (Guaranteed by Memorial Medical Center) PUERTO RICO Hospital De La Conception (Guaranteed by Ascension Health) RHODE ISLAND Lifespan Rhode Island Obligated Group South County Hospital St. Joseph Health Services of Rhode Island Westerly Hospital SOUTH CAROLINA CareAlliance Health Services (d/b/a Roper St. Francis Healthcare) Conway Hospital Greenville Hospital System Lexington County Health Services District Palmetto Health Alliance Self Regional Healthcare Spartanburg Regional Healthcare System A3 A3 A1 A1 Baa1 A1 A1 Stable Stable Stable Stable Stable Stable Stable A3 Ba1 Caa1 Caa1 Negative Stable Negative Watchlist Aa1 Negative Baa2 Caa2 Aa3 A1 Baa3 Ca Baa1 Baa1 Ba2 A2 Aa3 Baa3 A2 A3 Baa3 Aa3 Aa3 Baa2 Aa3 Caa1 Caa1 Baa1 Negative Negative Stable Stable Negative Negative Stable Stable Negative Stable Stable Negative Stable Stable Negative Stable Positive Negative Stable Negative Negative Stable

Long-Term Rating [2]

Outlook [3]

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OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
SOUTH DAKOTA Avera Health Evangelical Lutheran Good Samaritan Society Regional Health Sanford Health TENNESSEE Baptist Health System of East Tennessee Hospital (Parity with Catholic Health Partners Trust Indenture) Blount Memorial Hospital East Tennessee Children's Hospital Erlanger Medical Center Jackson-Madison County General Hospital Methodist Healthcare Mountain States Health Alliance TEXAS Baylor Health Care System Children's Medical Center of Dallas CHRISTUS Health Cook Children's Medical Center East Texas Medical Center Regional Healthcare System Good Shepherd Medical Center Harris County Hospital District Hendrick Health System Hopkins County Hospital District Hunt Memorial Hospital District Irving Hospital Authority (Guaranteed by Baylor Health System) Memorial Health System of East Texas Memorial Hermann Hospital System Methodist Hospitals of Dallas Mission Hospital Mother Frances Health System Northeast Hospital Authority Richardson Hospital Authority (Formerly Richardson Regional Medical Center) Scott & White Healthcare Tarrant County Hospital District (JPS Health Network) Texas Children's Hospital Texas Health Resources United Regional Health Care System Aa2 Aa3 A1 Aa3 Baa2 Baa2 A2 A3 Ba1 Baa1 Aa2 Baa3 A2 Aa3 Baa2 Baa1 A3 Baa2 A1 Aa3 Aa2 Aa3 A2 Stable Stable Stable Stable Stable Stable Stable Positive Negative Stable Stable Negative Stable Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable A1 A3 Baa1 A3 A1 A2 Baa1 Positive Stable Negative Negative Stable Stable Stable A1 A3 A1 A1 Stable Stable Positive Stable

Long-Term Rating [2]

Outlook [3]

30

JANUARY 25, 2012

OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
UTAH IHC Hospitals, Inc. University of Utah Hospital (Moral Obligation Bonds) VERMONT Fletcher Allen Health Care VIRGINIA Virginia Hospital Center Augusta Health Care, Inc. Carilion Health System Centra Health Chesapeake General Hospital Children's Hospital of the King's Daughters Inova Health System Johnston Memorial Hospital Martha Jefferson Hospital & MJH Foundation MediCorp Health System Potomac Hospital Prince William Hospital Riverside Health System Rockingham Health Care, Inc. Sentara Healthcare Valley Health System Virginia Commonwealth University Health System WASHINGTON Central Washington Hospital Seattle Children's Hospital Evergreen Hospital Medical Center Kadlec Hospital MultiCare Health System Overlake Hospital Medical Center Providence Health System Seattle Cancer Care Alliance Skagit Valley Hospital Southwest Washington Medical Center Swedish Health Services Virginia Mason Medical Center Baa2 Aa3 A3 Baa2 A1 A3 Aa2 A3 Baa2 A2 A2 Baa2 Negative Stable Negative Stable Stable Stable Stable Stable Stable Stable Stable Positive A2 A1 A1 A2 A2 A3 Aa2 A3 A3 Baa1 Baa1 A3 A1 Baa1 Aa2 A1 A1 Positive Stable Stable Stable Stable Positive Stable Stable Stable Stable Positive Stable Stable Stable Stable Stable Positive Baa1 Stable Aa1 Aa2 Stable Stable

Long-Term Rating [2]

Outlook [3]

31

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OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

Moody's Healthcare Ratings by State (as of December 31, 2011)


Issuer [1]
WEST VIRGINIA Cabell Huntington Hospital Charleston Area Medical Center Davis Memorial Hospital Princeton Community Hospital Weirton Medical Center West Virginia United Health System WISCONSIN Agnesian Healthcare, Inc. Aurora Health Care, Inc. Bellin Memorial Hospital Children's Hospital and Health System, Inc. Gundersen Lutheran Luther Hospital (Guaranteed by Mayo Clinic) Mercy Health System Corporation of Janesville Meriter Hospital Monroe Clinic ProHealth Care Obligated Group University of Wisconsin Hospitals & Clinics Aspirus Wausau Hospital Wheaton Franciscan Services ThedaCare, Inc. WYOMING Wyoming Medical Center
[1] Ratings reflect unenhanced ratings and underlying ratings, the latter of which also maintain Aaa-insured ratings. [2] Positive (P), Negative (N), Stable (S), Uncertain (U), Developing (DEV), Watchlist for Downgrade (WD), Watchlist for Upgrade (WU), Watchlist with Uncertain Direction (WUD). [3] Organization is listed in the state where it is headquartered; the system may have debt issued in other states that carry the system's rating.

Long-Term Rating [2]


Baa1 A3 Ba1 Ba2 Ba3 A2 A3 A3 A2 Aa3 A1 Aa2 A2 A1 A3 A1 A1 A2 Baa2 A1 A3

Outlook [3]
Stable Negative Negative Stable Negative Stable Positive Stable Stable Stable Negative Stable Stable Stable Stable Stable Positive Positive Stable Stable Stable

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OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012

U.S. PUBLIC FINANCE

Report Number: 139377

Author Brad Spielman Production Associate Amanda Ealla

Editor Joseph Cullen

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JANUARY 25, 2012

OUTLOOK: U.S.NOT-FOR-PROFIT HEALTHCARE OUTLOOK REMAINS NEGATIVE FOR 2012