Moody’s Investors Service holds a stable outlook for
In a new Industry Outlook report on German private hospital operators, Moody’s said that rating pressure is likely to depend on the extent of acquisition activity by private hospital chains that hope to expand their market positions by targeting financially underperforming public or charity-sponsored hospitals, which still dominate the German hospital market.
“Private hospital operators in Germany have been successful in protecting their profitability levels over recent years, despite the challenging operating environment, marked by structural and regulatory issues, and also despite some margin dilution due to the acquisition of underperforming hospitals,” said Christian Hendker, a Moody’s Analyst and author of the report.
“While the German hospital sector will continue to benefit from increasing demand for healthcare as the population ages and technological advances in treatments are made, it will also face constant pressure on real reimbursement rates per case in view of the constrained health insurance budgets,” Hendker continued.
In the context of ever-increasing health insurance spending, healthcare reforms and regulatory changes are pressuring German hospital operators to adjust their processes in order to improve efficiency and utilisation levels. One element of regulatory changes is the gradual change of the funding structure from a system based on compensation per patient day towards a case-based reimbursement scheme, also known as ‘diagnosis-related groups’ (or DRGs), which will be fully implemented by
2009. As a result, Moody’s believes that an important driver of credit quality will be hospital operators’ ability to shift the operational focus from effective management of approved cost budgets towards improving treatment efficiency and quality to achieve greater case volumes and a favourable case-mix.
Moody’s added that regulatory changes and overcapacity will continue to accelerate industry consolidation, and ratings could be pressured either by large-scale acquisitions, or a failure to make large acquired hospitals profitable. The rating agency therefore cautions that event risk extends not only to the decision to acquire, but more so to the scope and breadth of restructuring and investment requirements linked to acquisitions. These acquisition strategies typically result in negative free cash flows, which makes the availability of sufficient funding sources indispensable.
Moody’s currently rates two of the market-leading operators of for-profit hospitals in
