Hospitals' Credit Rating Drops

But hospital officials are confident that their $290 million purchase of Rex Healthcare in Raleigh will reverse the reduced rating.

Bruce Gordon, an analyst for Moody's Investors Service, lowered his security rating of UNC Hospitals' $183 million of long-term debt by one level, decreasing the rating from Aa3, the third highest possible rating, to A1.

"What the rating tells investors is the likelihood their purchase of UNC Hospital bonds will be repaid," said Gordon.

But Gordon also said that even the decreased rating puts UNC Hospitals behind only about 12 percent of business firms that his agency rates. "The A1 rating tells (investors) there is still a high likelihood their investment will be returned," he said.

Gordon said his agency has been following the financial progress of UNC Hospitals since 1992 and made the recent rating after observing a steady decrease in the hospital's income.

"By far the most influential force was a four-year decline in UNC Hospitals' operating cash flow," he said.

Eric Munson, president and CEO of UNC Hospitals, said the decrease in income was due mostly to the recent Balanced Budget Act, which reduced Medicare reimbursement to hospitals. He said the hospital has lost a projected $70 million between 1998 and 2002 due to lost income from Medicare.

Gordon also said higher demand for qualified nurses depleted hospital funds, also contributing to the loss in income.

Such problems are common for hospitals across the country, said Gordon, who cited other examples of hospitals having their credit rating lowered. "We've downgraded far more hospitals than upgraded in the past three years," he said.

But UNC Hospitals hopes to improve its financial health through its purchase of Rex Healthcare last April. Munson said that Rex and UNC Hospitals can share many of the same resources.

"The key word is synergies," he said. "I believe that if we're successful in consolidating services with Rex, we will move back into double-A."

The hospital paid $100 million to obtain Rex and acquired the Raleigh-based hospital's $153 million of debt. UNC Hospitals also agreed to pick up capital expenses of $37 million in its purchase, but Gordon said these expenses did not weigh heavily in his assessment of the hospital's financial health.

Gordon said that although Rex has been losing money for the last three years, his agency has observed a recent upward swing in the firm and thinks the purchase will benefit UNC Hospitals in the long run.

"Rex is very well positioned in the Raleigh-Durham market," he said. "It makes sense to have a strong presence in that area."

Munson expressed optimism that the prior financial losses of Rex would be turned around by the hiring of a new CEO last year.

Gordon said that it will take many years for UNC Hospitals to regain its investment in Rex, but that his agency will only need two years to make an accurate evaluation of the purchase's long-term benefits.

"From our standpoint, if in two years (Rex) is still clicking along, we will feel more comfortable with our financial assessment of UNC Hospitals," he said.

But Munson said that even the current credit rating would not have a negative effect on hospital operations.

"It will make us run faster."

The University Editor can be reached at udesk@unc.edu.