S&P is preparing for a massive overhaul its standalone hospital rating process which is expected to affect close to 25% of all rated hospitals. With the possible exception of S&P, nobody knows how each hospital will be impacted.

S&P is asking borrowers, investors and other market participants to comment on proposed changes intended to provide additional transparency and help the markets better understand how the rating agency evaluates standalone acute care providers. Health systems rated under S&P’s system criteria will not be affected.

S&P expects that of the 450 hospitals currently rated, 12-15% of the remaining ratings will be lowered and 5-8% will raised, “generally by one notch”. In a webcast this afternoon, S&P officials went into great detail on how weights will affect various components of a borrower’s enterprise and financial profiles.

Unfortunately, S&P was silent on exactly how the new criteria would differ from the existing approach, making it very difficult to determine who will be affected, and how.

Comments are due by March 7, 2014, and S&P said they will release the final criteria within 1-2 months. Once the final criteria are out, they will be applied to all ratings going forward. A hospital that is up for annual review (or is seeking a rating in connection with accessing the bond markets) will be evaluated using the new criteria. In other words, hospitals will not know whether they are affected until they come up for review or go to the bond markets.

Given the potential impact of a rating change on a hospital’s cost of debt, we recommend that after the criteria are finalized, hospitals rated by S&P ask their analyst to explain how they will be affected.

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