1. Moody’s Not-For-Profit Healthcare Outlook
Brad Spielman, Vice President
Healthcare Ratings Group
San Francisco, CA
(415)

2. Moody’s Healthcare Portfolio
We rate ~530 not-for-profit hospitals and healthcare systems (~1,200 total hospitals)
Approximately $113 billion of total rated debt outstanding
Stand-alone hospitals (as small as 2,000 admissions)
Multi-state systems (with more than 400,000 admissions)
Specialty hospitals
Not-for-profit healthcare median rating is A3

3. Moody’s Industry Outlook: 2008 - 2009
In September 2008, Moody’s reaffirmed the stable outlook on the U.S. Not-for-Profit Healthcare Industry:
Most hospitals and health systems continue to show resiliency in financial performance; Medicare rates for FY 2009 appear relatively favorable
However, substantially weaker economy in has created more challenging operating environment

4. Weaker Economy Has Created Challenges
Higher charity care levels
Employers discontinue coverage; more working poor
Increased bad debt expense
Co-pay and higher deductible products
Softening inpatient volumes
Patients self-regulate healthcare needs, postponing elective procedures
Fundraising may suffer
Recent consumer and corporate wealth declines
Potential reductions in Medicaid funding Several state economies have weakened over the past year
Decline in unrestricted cash
Market turmoil has lead to large losses

5. Hospitals are Reacting Quickly to Challenges
Productivity benchmarking regarding FTEs
Length of stay reductions
More aggressive upfront registration
Outsourcing of certain functions
Greater investment in IT; more rapid installation

6. Medicare Rates for FFY 2009 Relatively Favorable
3.6% increase for inpatient rates; 3.0% for outpatient
42 compliance measures for quality; down from 72 that were proposed, easing the burden
Non payment for “never-events” begins Oct 1st
Uncertainties surrounding “bundled payment” concept; testing begins in 2009 in four states

7. Operating Cash Flow Margin
FY 2007 Medians: Down from FY 2006, Still Favorable to Years Following Balanced Budget Act of 1997
Ratio
2006
2007
1999
Operating Margin
2.3%
2.1%
0.51%
Operating Cash Flow Margin
9.2%
9.0%
MADS Coverage
3.9x
3.04x
Days Cash on Hand
154.3
156.6
146.5
Cash-to-Debt
109.0%
110.9%
90.6%
Debt-to-Cash flow
3.6x
3.7x
4.07x
Debt-to-Cap.
38.9%
38.6%
37.8%

8. How Is the Industry Doing?
Compares favorably to 2000 when 57% of hospitals reported an operating profit

9. How Is the Industry Doing? Another Look

10. Looking Forward
Expect continued moderating in financial performance in FY 2008
Competition for patients will continue; leading to softer patient volumes, particularly ambulatory setting
Medicare:
Recovery Audit Contractor (RAC) initiative will increase pressure on revenues
Uncertainty regarding CMS “bundled payment” concept may pressure performance
Rates for FFY 2009 appear relatively favorable
Cost reduction efforts will be key going forward
Increased capital appetite as the population ages

11. Financing Trends
High volume of issuance driven by replacement of Auction Rate Products, and Insured Variable Rate Demand Bonds
Uninsured Fixed Rate Bonds; issuers looking for greater flexibility to issue bonds backed by only their own credit
Variable Rate Demand Bonds backed by Letters of Credit or Self Liquidity, driven in part by pre-existing swap portfolios
Increased rating activity
Market volatility require issuers to be nimble, flexible

12. Appendix I Recent Rating Trends

13. Rating Activity Remains Favorable; Nearly Equal Downgrades to Upgrades through June 2008

14. Nearly Two Decades of Industry Shifts and Ratings Changes
Negative
Volatility post-BBA
Medicare PPS, TRA
Stabilization returns
Relative stability (pre-BBA)
Stabilization

15. About 10% (or 50) of Moody’s ratings are below Investment Grade
Not-for-Profit Healthcare Ratings: More Spec Grade Than Other Muni Credits
About 10% (or 50) of Moody’s ratings are below Investment Grade
Unrated market of small healthcare organizations: nearly all spec grade
(544 Ratings; Excludes Credit Enhanced Ratings)

16. Not-for-Profit Hospital Ratings Distribution
Ratings Distribution (531 credits)
Outlook Distribution