S&P released its revised methodology for rating standalone, not-for-profit hospitals. While the information is highly detailed and represents a significant step forward in transparency, it remains unclear as to exactly how hospitals will be affected.

A year ago, S&P announced it was seeking comments on proposed changes intended to bring increased transparency to the rating process. The rating agency’s last criteria was published in 2007.

While yesterday’s release provides a great deal of detail on the various factors and weights S&P uses in its process, the methodology still involves numerous qualitative adjustments. As such, we expect hospitals will be challenged to determine how they may be affected until S&P formally reviews them.

To reach its initial indicative rating, S&P combines an Enterprise Profile with a Financial Profile. Each profile is composed of four factors. Factors are assigned fixed weights. For example, within the Enteprise Profile, management is weighed at 10% while market position is weighed at 50%. Each factor is broken down into subfactors with their own fixed weight and score. When S&P rates a hospital, the analyst will assign each factor a score from 1 (strongest) to 6 (weakest). The two profiles are then adjusted by four other parameters each to arrive at the final Enterprise and Financial profiles.

Once the Enteprise and Financial profiles are combined into an initial indicative rating, S&P applies Overriding Factors to arrive at its final indicative rating. Overriding Factors include operational risk, extraordinary financial characteristics, distinct organization structure or specialty, and significant financial distress. Each factor could adjust the initial rating by up to three notches, although most are limited to a one notch adjustment up or down.

To arrive at its final rating, S&P performs a peer comparison, which can adjust the rating by one full notch up or down. Peer groups are not clearly defined and can be other providers with similar ratings, market position, or scope of services.

While the methodology still leaves a lot to the analyst, it does shed some light on how S&P goes about its process. For example, interim data is weighed at 20%, while the previous year’s audit is weighed at 45% and the audited period before that at 35%.

The new criteria will be applied starting immediately. Within the next 6 months, S&P will review standalone hospitals it believes could go up by at least one notch up or down. All other standalone hospitals will be reviewed within the next 12 months.

Note that the new criteria only applies to standalone hospitals and does not apply to systems. S&P defines a system as follow:

  • 3 or more hospitals and $1.5 billion revenue; or
  • $750 million in revenue and at least one of the following:
    • 3 or more hospitals in at least 2 states;
    • 3 or more hospitals in a single state if the largest is less than 65% of revenue;
    • 4 or more hospitals in a single state with “about 15%” of total revenue from non-acute care business; or 10 or more hospitals.

Of the 400 standalone providers currently rated by S&P, the agency expects 75% will not be affected by the new methodology –assuming of course that their credit picture has not changed. Of the remaining 25%, up to 10% will be upgraded and 15% will be downgraded.

More Info

{phocadownload view=file|id=80|text=Standard & Poor’s U.S. NFP Stand-Alone Hospitals — Methodology and Assumptions (12/15/2014) (485KB)|target=s}{phocadownload view=file|id=81|text=Standard & Poor’s U.S. NFP Stand-Alone Hospitals — Implementation (12/15/2014) (266KB)|target=s}{phocadownload view=file|id=82|text=Standard & Poor’s U.S. NFP Stand-Alone Hospitals — FAQ’s (12/15/2014) (288KB)|target=s}